Transfer pricing is a term to refer to pricing policies in a transaction between parties who have a special relationship. This understanding is actually neutral. However, transfer pricing is often seen as an attempt by multinational companies to reduce tax burdens and shift profits.
Multinational companies often use transfer pricing to shift profits to countries with low taxes, thereby reducing their tax liabilities. This practice has become increasingly common in recent years, as multinational companies seek to profit from differences in tax rates in different countries.
To address the issue of transfer pricing, most countries have introduced regulations to ensure that related companies trade at fair prices. This means that the price charged for buying and selling goods or services between related companies must be the same as the price that would apply to the same goods or services traded between unrelated companies under the same circumstances.
To determine whether transfer pricing is to shift profits to low-tax areas, tax authorities usually conduct audits. This audit involves examining transactions between related companies to ensure that prices are trading fairly. If there is discovery of transactions at unfair prices, the tax authorities can demand them to pay additional taxes.
Conclusion
Overall, transfer pricing is an important issue in international taxation that has a significant impact on the allocation of profits between different countries. To ensure that related companies trade at fair prices, most countries have introduced rules and regulations to regulate this, and tax authorities conduct audits to ensure compliance with these rules.
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