Global Transfer Pricing Guide: Rules and Best Practices

As businesses expand across borders, managing intra and intercompany transactions becomes increasingly important for tax compliance and to avoid conflict with tax authorities. A big part of this is transfer pricing, which is all about how you price goods, services, and intellectual property shared within a multinational group.

In this guide, we’ll cover what global transfer pricing is, the rules that govern it, and actionable best practices to stay compliant and efficient.

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What is transfer pricing, and why is it important for international businesses?

Transfer pricing isn’t just an internal accounting exercise. It impacts tax liabilities, your chances of getting audited, and determines how well you’re following the rules.

What is a transfer price?

A transfer price is the price charged between two entities of the same multinational company for goods, services, or intangible assets.¹ To get a better grasp on what a transfer price is, let’s look at this example:

If the US-based subsidiary provides services to a UK-based affiliate, the amount billed is the transfer price.

While this may sound like a simple internal accounting entry, it carries major tax and compliance implications. Governments closely monitor these prices because they can be manipulated to move profits to low-tax regions, reducing overall tax liability.

Global transfer pricing policy

To keep things fair and legal across borders, companies need a consistent and solid transfer pricing policy for intra-company transactions.

A sound global transfer policy confirms that intercompany transactions reflect market-based terms, also known as the arm’s length principle. This way, each party acts in its own best interest, as unrelated third parties would.

Adopting this approach helps companies avoid disputes with tax authorities and maintain consistency in their global operations.² A well-documented policy promotes transparency, mitigates tax risks, and satisfies regulatory requirements across jurisdictions.

Regulations on transfer pricing

Global transfer pricing regulations are shaped by guidelines from the Organisation for Economic Co-operation and Development (OECD), which most countries align with.³ However, local laws can vary in scope and enforcement:

• United States: The IRS follows Section 482 of the Internal Revenue Code, emphasizing arm’s length pricing and thorough documentation.⁴
• EU and other regions: While aligned with OECD guidelines, individual countries impose unique documentation requirements and penalties for non-compliance.

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Global transfer pricing principles and strategies

Managing global transfer pricing the right way requires identifying common risks and following standardized approaches that meet local and international rules.

Potential issues

Poor global transfer pricing principles and practices can lead to a host of challenges:

• Double taxation: If two countries disagree on the proper transfer price, the same income might be taxed twice.⁵
• Penalties: Inadequate documentation can result in steep fines or adjustments.
• Audit risk: Authorities are increasingly scrutinizing global transfer pricing arrangements, especially in high-risk industries like tech and pharmaceuticals.

Best practices

To manage these risks, multinational businesses should do the following:

1. Use comparables: Benchmark your transfer prices against third-party transactions to ensure alignment with the arm’s length principle.
2. Centralized policies: Create a consistent global transfer pricing policy across all subsidiaries.
3. Monitor regularly: Business models and regulations evolve. Reassess global transfer pricing principles and practices annually or during major structural changes.
4. Train internal teams: Ensure your finance and tax teams understand transfer pricing basics to flag compliance issues early.
5. Collaborate with advisors: Work with international tax advisors to ensure your approach reflects current regulatory developments and includes jurisdiction-specific nuances.
6. Use technology tools: Leverage digital tools and platforms that help automate data collection, run comparable analyses, and prepare global transfer pricing documentation more efficiently.

A proactive approach helps minimize risk, enhance transparency, and reduce audit exposure, ultimately preserving business continuity and protecting profit margins.

Global transfer pricing documentation

Robust documentation is your strongest defense during audits. It should typically include:

Several countries have adopted a three-tiered approach based on OECD guidance: A Master File, Local Files, and Country-by-Country Report.³

• Master File: Contains global information about the MNE group
• Local Files: Contains local details about intercompany transactions
• Country-by-Country Report: Shows revenue, profit, and taxes paid per jurisdiction

Failing to prepare global transfer pricing documentation can lead to significant financial and reputational damage. As tax authorities around the world increase their scrutiny of cross-border transactions, timely and well-prepared documentation is a regulatory necessity.

Businesses should review local requirements annually and invest in automation tools to reduce human error and streamline compliance.

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Final thoughts

Global transfer pricing is a key part of running an international business. Fair pricing between branches, staying on top of international rules, and keeping solid documentation all play a big role in keeping operations running smoothly.

Paired with Wise Business, your company can also handle the movement of funds across borders efficiently and at low cost, supporting the financial operations behind your global transfer pricing policy.

Sources:

1. Transfer Pricing: What It Is and How It Works, With Examples | Investopedia
2. Transfer Pricing and Cross-Border Transactions | Bloomberg Tax
3. Worldwide Transfer Pricing Reference Guide 2022-23 | Ernst & Young
4. Transfer Pricing | IRS
5. Global Transfer Pricing Services | KPMG
6. Transfer Pricing Documentation | Deloitte