Which statement about transfer pricing is correct?

Which statement about transfer pricing is correct?

• A. It is illegal in all cases.
• B. It has no effect on profits.
• C. It involves inter-company pricing that may shift profits and is subject to government scrutiny.
• D. It applies only to loans.

Answer: (C)

Transfer pricing is about the prices charged for transactions between entities within the same corporate group, often across borders. These inter-company prices can move where profits are earned and taxed, which is exactly why tax authorities scrutinize them to ensure profits aren’t artificially shifted to low-tax jurisdictions. In practice, prices should reflect an arm’s length standard—the price that would be charged between unrelated parties in similar circumstances—and may require documentation and adjustments if they don’t. So the statement that correctly describes transfer pricing is that it involves inter-company pricing that may shift profits and is subject to government scrutiny. It’s not illegal in all cases, it can affect profits, and it isn’t limited to loans.

Transfer pricing is about the prices charged for transactions between entities within the same corporate group, often across borders. These inter-company prices can move where profits are earned and taxed, which is exactly why tax authorities scrutinize them to ensure profits aren’t artificially shifted to low-tax jurisdictions. In practice, prices should reflect an arm’s length standard—the price that would be charged between unrelated parties in similar circumstances—and may require documentation and adjustments if they don’t. So the statement that correctly describes transfer pricing is that it involves inter-company pricing that may shift profits and is subject to government scrutiny. It’s not illegal in all cases, it can affect profits, and it isn’t limited to loans.