Transfer pricing means the pricing of transactions or arrangements between Related Parties or Connected Persons that are influenced by the relationship between each transacting parties.
In a typical transaction between independent businesses, market forces decide the pricing.
However, Related Parties may not adhere to these market forces and could potentially manipulate prices (non-arm’s length pricing) to shift profits to lower tax jurisdictions, reducing their overall tax burden.
To prevent this manipulation of prices, transfer pricing rules are developed to ensure that transactions between Related Parties are carried out on arm’s length terms, as if the transaction was carried out between independent parties.
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