Definition of transfer pricing
A price is defined as the value, most often expressed in monetary units, that the buyer has to pay the seller for the goods or services that are the subject of the transaction.
What is transfer pricing?
Transfer prices are the prices applied in all transactions carried out by entities linked by capital, family or personal ties.
Prices in transactions concluded with entities or counterparties whose beneficial owner has its registered office or place of management in a country applying harmful tax competition (a so-called tax haven) are also regarded as transfer prices.
The term transfer price was first used by Jack Hirshleifer in an econometric analysis. He built a model indicating the point of equilibrium between the marginal gross profit of acquiring a division and the marginal cost of selling it. The law as it now stands defines a transfer price as the financial result of conditions agreed or imposed as a result of existing relationships, including a price, remuneration, financial result or financial indicator.
Transfer prices: the definition under the OECD Guidelines and the Tax Ordinance
Legislation and the literature also contain the following definitions of a transfer (transaction) price:
- Transfer price, OECD Guidelines: transfer prices are the prices at which an enterprise transfers goods and intangible property or provides services to related enterprises.
- Transfer price, Tax Ordinance: a transaction price means the price of the subject of a transaction concluded between related parties within the meaning of the tax law on personal income tax, corporate income tax and tax on goods and services.
Under the arm's length principle, transfer prices applied between parties should correspond to the prices that unrelated parties would have agreed between themselves.