INSIGHT

What is Transfer Pricing? 

Sven Jost • November 17, 2025

Services: Transfer Pricing

---

Transfer pricing affects every business operating across international borders, yet many business leaders don’t fully understand or don’t fully value its strategic potential for their organizations. When companies engage in transactions with related entities in different countries (and sometimes even states), they have opportunities to optimize their tax position, improve cash management, and align their transfer pricing models with broader business objectives. Understanding transfer pricing becomes crucial not only for maintaining compliance but also for maximizing operational efficiency and supporting business growth. 

This article will explore transfer pricing fundamentals, examine its strategic applications for tax planning and business optimization, and outline how to operationalize effective transfer pricing models while maintaining compliance. 

Understanding Transfer Pricing Basics 

Transfer pricing refers to the prices companies set for transactions between related entities, such as subsidiaries, parent companies or sister companies. These transactions can involve goods, services, intellectual property or financing arrangements. The key principle governing transfer pricing is the “arm’s length standard,” which requires related party transactions to occur at prices that unrelated parties would agree upon in similar circumstances. 

Consider a U.S. parent company that purchases manufactured goods from its wholly-owned subsidiary in Ireland. The price the parent company pays for these goods represents the transfer price. This pricing decision affects not only tax obligations but also cash flow management, customs and duties, performance measurement, and overall business strategy. 

Companies establish transfer prices for various strategic reasons: 

Tax Planning and Optimization 

• Structuring transactions to achieve tax-efficient outcomes across jurisdictions 
• Aligning transfer pricing with business substance and economic reality 
• Supporting long-term tax planning strategies 

Business Operations 

• Measuring subsidiary performance accurately 
• Allocating resources efficiently across the organization 
• Managing cash flow between entities 
• Supporting operational decision-making 

Risk Management 

• Addressing potential tariff and customs implications 
• Preparing for due diligence in M&A transactions 
• Building defensible positions for tax authority interactions 

Learn more about our Transfer Pricing services

Strategic Tax Planning Through Transfer Pricing 

Effective transfer pricing serves as a powerful tool for tax-efficient structuring that aligns with genuine business needs. Organizations can develop transfer pricing models that support their cash management strategies while ensuring economic substance backs their pricing decisions. 

Modern transfer pricing planning considers the broader business context, including supply chain optimization, intellectual property strategies, and regional expansion strategies. Companies increasingly integrate transfer pricing considerations into their overall business planning process, ensuring that tax efficiency supports rather than conflicts with operational objectives. 

The key lies in developing sustainable models that reflect the real value creation within the organization while achieving legitimate tax benefits. This approach requires understanding how different jurisdictions approach transfer pricing and designing structures that work effectively across multiple tax systems. 

Operationalizing Transfer Pricing Models 

Once established, transfer pricing policies require efficient implementation and ongoing administration. Technology plays an increasingly important role in managing the complexity of intercompany transactions across multiple entities and jurisdictions. 

Successful operationalization includes: 

Process Integration 

• Embedding transfer pricing considerations into standard business processes 
• Automating documentation and reporting where possible 
• Creating clear governance frameworks for pricing decisions 

Technology Solutions 

• Implementing systems that support consistent pricing across transactions 
• Utilizing data analytics to monitor compliance and identify opportunities 
• Streamlining documentation and reporting processes 

Ongoing Management 

• Regular review and updating of transfer pricing policies 
• Monitoring changes in business operations that may affect pricing 
• Maintaining current documentation to support pricing decisions 

Transfer Pricing in Transactions and Due Diligence 

Transfer pricing models and documentation play a critical role in M&A transactions, both as a due diligence item and as a factor in valuation. Robust transfer pricing documentation demonstrates good governance and reduces potential liabilities for acquirers. 

During exit planning or acquisition processes, well-documented transfer pricing practices can: 

• Reduce due diligence timelines and costs 
• Minimize potential adjustment risks 
• Support valuation arguments 
• Demonstrate operational sophistication to potential buyers or investors 

Organizations planning for eventual transactions should ensure their transfer pricing models and documentation meet institutional-grade standards well in advance of any transaction timeline. 

Compliance and Risk Management 

While strategic planning drives much of transfer pricing’s value, compliance remains essential for protecting that value. Tax authorities worldwide continue to focus on transfer pricing as they work to help ensure appropriate tax collection in their jurisdictions. 

Transfer pricing violations can carry significant penalties, with the IRS imposing penalties of up to 40 percent of additional taxes owed in cases of substantial understatement. Beyond financial penalties, transfer pricing disputes can trigger lengthy audits and create administrative burdens across multiple jurisdictions. 

However, for many organizations, particularly smaller companies, the compliance risk may be manageable with proper planning and documentation. The key lies in building defensible positions through: 

Comprehensive Documentation 

• Economic analyses supporting chosen transfer prices 
• Comparisons with similar transactions between unrelated parties 
• Clear explanations of business rationale behind intercompany arrangements 

Proactive Planning 

• Regular review of transfer pricing positions 
• Updates reflecting changes in business operations or tax law 
• Integration with overall tax planning strategies 

Building Effective Transfer Pricing Programs 

Successful transfer pricing programs balance strategic objectives with compliance requirements. Organizations should consider transfer pricing as part of their broader business strategy rather than viewing it solely through a compliance lens. 

Effective programs typically include: 

Strategic Foundation 

• Clear understanding of business objectives and value drivers 
• Integration with overall tax and business planning 
• Consideration of operational and financial factors 

Robust Documentation 

• Transfer pricing studies that support chosen methodologies 
• Regular updates reflecting business changes 
• Documentation that supports both planning and compliance objectives 

Ongoing Management 

• Regular monitoring and updating of policies 
• Proactive identification of planning opportunities 
• Efficient administration through process and technology 

Working with BPM 

Transfer pricing requires specialized knowledge of complex regulations and strategic planning considerations that vary across jurisdictions. BPM’s tax professionals understand both the compliance requirements and the strategic opportunities that effective transfer pricing can provide. 

Our team helps companies develop comprehensive transfer pricing strategies that support business objectives while maintaining appropriate compliance standards. We provide technology-enabled transfer pricing analyses, documentation, operational transfer pricing support and automation, ongoing advisory services, and support for transaction-related transfer pricing needs. 

To schedule a consultation with our transfer pricing team to review your current practices and identify opportunities for improvement, contact us.