How do governments apply transfer pricing rules?

Transfer pricing refers to the prices charged by one company in a multinational enterprise (MNE) for goods and services that it provides to another company in the MNE. Governments use transfer pricing rules to ensure that companies belonging to an MNE pay the proper amount of taxes. In Washington, transfer pricing rules are enforced in order to limit the amount of profits that companies can shift away from one jurisdiction to another. By doing this, the government is able to protect its own tax base and maximize its revenue. Transfer pricing rules also ensure that transactions between companies of an MNE are at arm’s length – meaning they are comparable to those taking place between two independent entities. To ensure that companies are paying the appropriate taxes, the United States has developed its own transfer pricing rules. These rules involve the use of pricing methods, such as the cost-plus method, the resale price method, and the comparable profit method. The IRS also requires companies to provide comprehensive documentation verifying the accuracy of their transfer pricing. In addition to implementing transfer pricing rules, Washington also has a system of international taxation agreements with other countries. These agreements are designed to prevent companies from using transfer pricing to avoid taxes. Through these agreements, the government ensures that MNEs are paying taxes in the jurisdictions in which they are doing business.

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How do governments apply transfer pricing rules?

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