11. Transfer Prices

This chapter addresses the issue of transfer prices. This has become more and more relevant in a globalized economy and increasingly in the role of multinational firms. Transfer prices are related to transactions between firms that are considered to be related parties, and as such, transactions may not be directly subject to the “arm’s length principle.” Accordingly, the related transaction price needs to be justified by using a comparable non-related transaction. The OECD model convention on transfer prices is the central pillar of this topic, which establishes five main methods for assessing the transfer price of related transactions. Such a transfer price is based on a non-related transaction that is comparable with the related transaction in question. In turn, transfer price methods are divided into “traditional transaction methods” and “transactional profit methods,” either of which can be used to establish whether the conditions imposed in the commercial or financial relations between associated enterprises are consistent with the arm’s length principle. The traditional transaction methods are the following: the comparable uncontrolled price method or CUP method; the resale price method; and the cost-plus method. The widely used transactional profit methods are the transactional net margin method and the transactional profit split method.