What is Transfer Pricing?

Transfer pricing becomes relevant when related entities transact with each other - for example, a parent company selling goods to a subsidiary in another country. Tax authorities require these transactions to be priced at arm's length (the same price that would be charged to an unrelated party) to prevent profit shifting to low-tax jurisdictions. Transfer pricing rules are complex and heavily scrutinised by tax authorities globally. Incorrect transfer pricing can result in double taxation, penalties and reputational damage. Most countries follow OECD guidelines for transfer pricing. For small businesses, transfer pricing typically becomes relevant when they have related entities in different countries or when related parties transact (like renting property from a director). Proper documentation of the pricing methodology used is essential. SortBooks helps by maintaining clear records of intercompany transactions in Xero, supporting transfer pricing documentation requirements.