Internal price (also known as transfer price) is the price charged between different departments of a company or between different companies in a group for internally exchanged goods and services (e.g. delivery of goods, royalties, loans, provision of employees). It plays an important role in tax law since it can be used to shift profits to low-tax regions (e.g. due to varying trade tax rates) or countries (low tax regions, tax havens). Therefore, there are complex regulations to prevent misuse. At the international level, e.g. the OECD has concluded an action plan against BEPS (Base Erosion and Profit Shifting), which has been or should be implemented within local law by many countries.
The principle here is always the arm’s length price, i.e. the appropriate transfer price is the one that an independent third party would have paid. The OECD stipulates for its member states that cross-border services and supplies must only be recognised for tax purposes if the conditions for these services and supplies correspond to those of arm’s length transactions. If this condition is not met, the tax authorities are entitled to increase profits at the taxpayer’s expense. This applies irrespective of the size of the enterprise or the flows of goods or services within the group.
This could also be relvant for you:
Are you interested? Click here to find out how we can support you.