How do governments apply transfer pricing rules?

Transfer pricing rules are used by governments to ensure that multinational corporations pay the appropriate amount of taxes for the goods and services they produce and trade. In Minnesota, the application of transfer pricing rules to international transactions is outlined in the Minnesota Corporate Franchise Tax Act. The Act provides guidance on how to appropriately price goods and services that are sold and transferred between related entities. The main purpose of the transfer pricing rules is to make sure that multinational corporations do not avoid paying taxes by artificially setting the price of goods and services through intercompany transactions. This type of tax avoidance is commonly referred to as “shifting profits”. When transfer pricing rules are applied, they force corporations to price goods and services at arm’s length, meaning that the price of the goods and services must reflect their fair market value. In addition, the transfer pricing rules also ensure that the taxes paid by a multinational corporation are consistent with the profits generated in each jurisdiction and that income is not shifted to a lower tax jurisdiction. This is done by using formulas to calculate the arm’s length price for goods and services. Allocating profits between tax jurisdictions accurately ensures that no multinational corporation is able to avoid paying taxes by shifting profits.

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How do governments apply transfer pricing rules?

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