International tax planning is a crucial aspect of global business operations. The strategy’s main crux revolves around the proper management and organization of tax obligations across various jurisdictions. Among the methods deployed to accomplish effective tax planning, the concept of transfer pricing stands out as an essential tool. It impacts the bottom line of multinational firms and it is subject to rigorous international scrutiny.

The Concept of Transfer Pricing

Transfer pricing refers to the prices charged for commercial transactions between various parts of the same organization, including trade of raw materials or finished products, services provided, or use of property among divisions. The primary goal of transfer pricing is to allocate net profit accurately to each part of the organization.

Functions and Importance of Transfer Pricing

Transfer prices serve as a mechanism for attributing the income earned from a sale between divisions of a company. It ensures that each division receives an appropriate share of the profit. This not only helps in presenting a clearer picture of each division’s profitability but also aids in making informed managerial decisions.

Transfer Pricing in Tax Planning

Companies operating across different tax jurisdictions often use transfer pricing techniques as part of their tax planning. By setting transfer prices between their units in high-tax and low-tax countries, such companies can decrease their overall tax liability.

How Transfer Pricing Affects Corporate Taxes

By adjusting the transfer prices of goods and services sold between subsidiaries, a corporation can manipulate the profit allocation to its divisions in various countries. This strategy can result in significant tax savings if the transfer prices are set so that profits are reported in low-tax jurisdictions, while costs are taken on in high-tax jurisdictions.

Understanding the Risks

While it may seem like an easy way to reduce tax liabilities, manipulating transfer prices has its risks. Tax authorities, particularly in high-tax jurisdictions, are likely to scrutinise such operations to ensure that transfer prices are set at arm’s length – that is, the price that would have been charged if the divisions were independent companies.


  1. What is the role of transfer pricing in international tax planning?
    Transfer pricing plays a significant role in international tax planning by helping businesses allocate their taxable income across different tax jurisdictions, thereby minimizing their total tax liability.

  2. How can transfer pricing be used to reduce corporate taxes?
    Transfer pricing can reduce corporate taxes by adjusting the prices of goods or services traded between subsidiaries, thereby shifting profits to jurisdictions with lower tax rates and costs to countries with higher rates.

  3. What are the risks involved in using transfer pricing for tax planning?
    The risks involve potential scrutiny from tax authorities who may deem the transfer pricing strategies as tax evasion, particularly if prices are not set at an arm’s length.

To sum up, using transfer pricing in international tax planning is a complex but potentially rewarding strategy for multinational corporations. However, firms need to be aware of the risks and ensure their transfer prices are compliant with tax laws in all jurisdictions they operate in.