What is Transfer Pricing?

Transfer pricing simply refers to the pricing of goods, services, or intellectual property that is transferred between companies that are part of the same multinational enterprise. This practice is important because it affects the profits of each company, their tax obligations, and ultimately the economic well-being of the countries they operate in.
 

Why Does Transfer Pricing Matter?

Effective transfer pricing policies ensure that profits are allocated fairly among related entities, aligning with local and international tax regulations. Since transfer prices influence taxable income, improper pricing can lead to tax inefficiencies, disputes, and regulatory scrutiny.

If a transfer price is set too high or too low, it can shift taxable income between entities, potentially reducing a company's overall tax liability. This has led tax authorities worldwide to strengthen regulations and enforce arm’s length principles, ensuring that transactions between related entities reflect market rates.

The Challenge of Transfer Pricing Compliance

Many jurisdictions have implemented strict transfer pricing regulations to prevent profit shifting and tax base erosion. When profits are allocated to lower-tax jurisdictions, this can lead to revenue losses for higher-tax countries. To address these challenges, businesses must maintain robust transfer pricing documentation and adopt compliance strategies aligned with OECD guidelines and local tax laws.

At BDO Malta, we help multinational enterprises manage transfer pricing obligations effectively, ensuring compliance, mitigating risks, and optimising tax efficiency.

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