Transfer pricing applies whenever related companies in different countries do business with one another. These transactions are known as controlled transactions or intercompany transactions. This is because they occur between businesses that are under common ownership or control, rather than between independent companies.
The transactions can involve much more than buying and selling products. They may include providing services, licensing intellectual property, making loans, sharing business costs, or charging management fees. Regardless of the type of transaction, the price charged should generally reflect what independent businesses would have agreed to under similar circumstances.
Although these transactions are common in multinational businesses, they can significantly affect where profits are reported and how much tax is paid in each country. For this reason, the IRS expects related companies to support their transfer prices with appropriate documentation and evidence that the pricing reflects market conditions.
Below are some of the most common examples of transfer pricing transactions.