Transfer Pricing

What is Transfer Pricing

Transfer prices are the prices of transactions between related parties (parent and subsidiary companies, companies under common control). By manipulating transfer prices, a group of companies can reallocate profits to jurisdictions with lower taxes.

Example: A German company (tax rate 30%) sells goods to its Irish affiliated company (12.5%) at a price below the market level. The Irish company sells to the end customer at the market price. The profit is “moved” to Ireland.

The Arm's Length Principle

The main international standard: related companies must conduct transactions at prices that would be established between independent parties under comparable conditions. The OECD Transfer Pricing Guidelines are the fundamental document.

Transfer pricing methods:

1. Comparable Uncontrolled Price Method (CUP) — the most preferred
2. Resale Price Method
3. Cost Plus Method
4. Transactional Net Margin Method (TNMM — the most widespread)
5. Profit Split Method

Controlled Transactions in Russia

Chapter V.1 of the Russian Tax Code: large transactions between related parties are subject to control. Notification threshold: >60 million rubles (with separate thresholds for different categories). Documentation: companies are required to prepare documentation confirming that prices are at market level.

Sanctions for violations: additional tax charged at market prices + a penalty of 40% (if intentional) or 20%.

Practical Task

A Russian company (20% corporate income tax) sells components to its Cypriot subsidiary (12.5%) at a price of 100 rubles/unit. The market price of similar components is 150 rubles/unit. Volume — 1 million units. Calculate: (1) The tax benefit for the group at the current price. (2) The reassessment if the Federal Tax Service adjusts the price to the market level. (3) The penalty.