Transfer pricing agreement definition: What is it?
A transfer pricing agreement, also known as an inter-company agreement, is a contract between two or more related parties that sets out the terms and conditions for the transfer of goods, services or assets between them.
Transfer pricing is becoming increasingly important in today`s global economy, as more and more businesses have operations in multiple jurisdictions, and tax authorities are becoming more strict in their enforcement of transfer pricing rules.
The purpose of a transfer pricing agreement is to ensure that all parties are following the same set of rules and principles when it comes to pricing the transfer of goods, services or assets. This helps to minimize the risk of double taxation, as well as the risk of tax authorities challenging the pricing of these transactions.
The definition of a transfer pricing agreement can vary depending on the specific context. For example, a transfer pricing agreement between a parent company and its subsidiary may include provisions related to the transfer of intellectual property, the provision of management services, or the sharing of research and development costs.
In general, a transfer pricing agreement will include the following elements:
1. Identification of the parties involved: The agreement should clearly identify all of the parties involved in the transaction, including their legal names, addresses, and tax identification numbers.
2. Description of the transaction: The agreement should describe the goods, services or assets being transferred, including any relevant specifications, quantities, and prices.
3. Pricing methodology: The agreement should specify the pricing methodology that will be used to determine the price of the transfer, such as the comparable uncontrolled price method or the resale price method.
4. Allocation of costs and risks: The agreement should allocate the costs and risks associated with the transaction between the parties, taking into account any relevant factors such as the level of risk assumed by each party, the complexity of the transaction, and the level of expertise required to carry out the transaction.
5. Documentation requirements: The agreement should specify any documentation requirements that the parties must comply with, including the preparation of transfer pricing reports, the maintenance of records, and the submission of documentation to tax authorities.
In conclusion, a transfer pricing agreement is a vital tool for businesses to manage their transfer pricing risks and ensure compliance with tax regulations. As such, it is important for businesses to have a thorough understanding of the definition and requirements of a transfer pricing agreement, and to work with experienced advisors to draft and implement effective transfer pricing policies.
