International Transfer Pricing: Regulations For Intra-Company Cross-Border Transactions

When businesses have operations in more than one country, they have to move assets, services, or funds between their own branches and stay compliant with international tax obligations, such as transfer pricing rules.

These rules exist to maintain fair taxation across borders and prevent profit shifting, a complex but necessary part of running a global company. If you’re unfamiliar with these regulations, you’ve come to the right place.

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Transfer pricing rules for cross-border intra-company transactions

To stay compliant with international tax requirements, businesses need to understand how transfer pricing policy applies to intra-company cross-border transactions.

Transfer pricing refers to the pricing of goods, services, and intangibles exchanged between entities under common ownership or control.¹ For example, if a U.S.-based parent company sends inventory to its subsidiary in Germany, the price it sets for that transfer is the transfer price.

These prices aren’t just internal. They impact tax outcomes and must align with regulatory expectations to prevent income shifting and tax base erosion.

What are cross-border transactions in the context of intra-company transfers?

Cross-border transactions refer to transactions between branches or subsidiaries of the same multinational enterprise (MNE) located in different countries. These intra-company activities could include:

• Transferring intellectual property rights
• Centralizing service functions like HR or IT
• Moving goods between a manufacturing hub and a regional distributor²

Because they’re not made at market value (as third-party deals would be), these transactions are subject to scrutiny and have to comply with transfer pricing policy regulations for fair taxation.

Cross-border transactions tax

The tax treatment of cross-border transactions is a must-know for multinational businesses, especially when it comes to intra-company transfers.

Tax implications for intra-company transfers

Even though these are intra-company transactions, they trigger real international tax consequences. That’s because each country wants to make sure that the portion of a multinational’s profit attributable to its jurisdiction is appropriately taxed.

Tax authorities look closely at:

• Whether arm’s length pricing has been used
• How the transaction impacts the income of each entity
• Whether the transaction was adequately documented³

For example, if a U.S. company licenses software to its wholly owned subsidiary in Brazil, it must determine a transfer pricing tax that reflects what independent parties would pay.⁴ Otherwise, the IRS (or Brazil’s tax authority) may adjust the income and impose penalties or back taxes.

Additionally, transfer pricing tax rules often include penalties for non-compliance, such as failure to submit timely documentation or failure to apply reasonable methods.⁵ These penalties can range from fines to full income adjustments and interest on unpaid tax.

Multinationals also face the risk of double taxation, where two jurisdictions tax the same income due to differing views on transfer pricing rules.³ Although many countries have double tax treaties, the process to resolve disputes can be time-consuming and uncertain.

How to determine the transfer price

Setting a fair transfer price for cross-border transactions depends on regulatory expectations, particularly in the United States, where the IRS enforces strict documentation and valuation standards.

Country-specific regulations (with a focus on the U.S.)

The U.S. Internal Revenue Service (IRS) has comprehensive transfer pricing rules under Section 482 of the tax code. It requires companies to justify the pricing of cross-border transactions using approved methods, including:

Each method has advantages depending on the transaction type and the availability of reliable data.

To stay compliant, companies need a robust transfer pricing policy and documentation that includes:

• Functional analysis of each entity involved
• Description of intercompany transactions
• Selection and application of pricing method
• Financial analysis and comparables

In 2017, the U.S. Tax Cuts and Jobs Act (TCJA) also introduced provisions like GILTI (Global Intangible Low-Taxed Income) and BEAT (Base Erosion and Anti-Abuse Tax), adding complexity to transfer pricing tax compliance.⁵ These changes make it even more important for businesses to apply and document arm’s length pricing. Clear documentation helps reduce the risk of audits, adjustments, and penalties under U.S. transfer pricing rules.

What is arm’s length pricing?

Arm’s length pricing means that the price charged between two related parties is the same as it would be between independent entities. This principle is foundational to all transfer pricing policy frameworks, including those outlined by the OECD and adopted by the U.S. and many other jurisdictions. It ensures that profit, and thus taxes, are fairly allocated across countries.

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Final thoughts

Transfer pricing tax, transfer pricing rules, and international tax laws are vital to running a compliant global business. With strong documentation and tools like Wise Business, your company can streamline cross-border transactions while staying on the right side of international regulations.

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Sources:

1. Transfer Pricing: What it is and how it works, with examples | Investopedia
2. Intra-group transactions: The principles of transfer pricing | TaxAdviser
3. Transfer Pricing and Cross-Border Transactions | Bloomberg Tax
4. Transfer Pricing | PwC
5. Transfer pricing | IRS