Transfer pricing governs how multinational companies set prices for transactions between their own entities in different countries. These rules prevent companies from artificially shifting profits to low-tax jurisdictions through manipulated intercompany prices.
Arm's Length Principle
The fundamental rule is that intercompany transactions should be priced as if the parties were unrelated. Prices should reflect what independent parties would agree to in comparable circumstances. This arm's length standard is the international norm endorsed by the OECD.
Employment Implications
Transfer pricing affects employment when employees perform services benefiting multiple group companies. Management fees, shared service charges, and secondment arrangements all require arm's length pricing. EOR arrangements must also consider transfer pricing principles.
Documentation Requirements
Most countries require documentation supporting transfer pricing positions. This typically includes analysis of intercompany transactions, comparable market data, and explanation of pricing methodology. Penalties for non-compliance can be substantial.