united-states finance
Is transfer pricing legal in the United States?
<p>Is transfer pricing legal in the United States? Transfer pricing allows companies to sell to its own subsidiaries without using market pricing mechanisms to do so. Is this legal in the United States? This would theoretically allow a company to sell minerals for 1 dollar a ton.</p>

<p>Transfer pricing is something that is required when related parties provide good or services to each other, in order to determine what part of the profit from the eventual sale of the goods or services is allocated to the initial transferor and what part is allocated to the final seller of the good or service.</p>
<p>There is no country in the world where transfer pricing is illegal, and ther is no reason that it should be.</p>
<p>The legal issue in transfer pricing is how to determine it correctly to be in compliance with tax and financial accounting standards that apply to it, and the proper transfer price for tax purposes is not necessarily the proper transfer price for financial accounting purposes.</p>
<p>Generally speaking, transfer prices are supposed to be set at an amount equal to the price that would have been reached in an arms length transaction between unrelated third parties.</p>
<p>If the transfer price is too high, the &quot;buyer&quot; isn't paying enough taxes on the final sale. If the transfer price is too low, the &quot;buyer&quot; is paying too much tax on the final sale.</p>
<p>Abuses in transfer pricing tend to occur when they are set to allocate almost all profits to the company in the low tax jurisdiction, and almost no profits to the related company in a high tax jurisdiction.</p>
<p>The proper means of setting transfer taxes is a highly technical area of international taxation and financial accounting.</p>
<blockquote>
<p>This would theoretically allow a company to sell minerals for 1 dollar
a ton.</p>
</blockquote>
<p>The proper transfer price of minerals is their fair market value. It is impossible to know if $1 a ton is too high, too low, or just right, without knowing more about the transaction.</p>

<p>Transfer pricing is of course legal: when an asset is transferred from one entity to another, there is a price.</p>
<p>However, transfers between subsidiaries or other related companies in different tax jurisdictions <em>are</em> subject to scrutiny by taxing authorities, who are interested in the <em>magnitude</em> of the price, as you note.  Many countries require the companies to set an &quot;arm's-length&quot; price, meaning a fair price that is comparable to a price that might be obtained for a similar transaction between unrelated entities (that is, entities that are separated by an arm's length).  There are many mechanisms, some of them fairly questionable in my opinion, for evaluating whether a given price is in fact an arm's-length price.  The relevant US statute is <a href="https://www.law.cornell.edu/uscode/text/26/482" rel="noreferrer">26 USC 482</a>.  The related regulations are at <a href="https://www.law.cornell.edu/cfr/text/26/1.482-0" rel="noreferrer">26 CFR 1.482-0</a> and following.</p>
