Transfer mispricing

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Transfer mispricing, also known as transfer pricing manipulation or fraudulent transfer pricing,^[1] refers to trade between related parties at prices meant to manipulate markets or to deceive tax authorities. The legality of the process varies between tax jurisdictions; most regard it as a type of fraud or tax evasion.

Generally, if two independent, unrelated parties negotiate with one other for a financial transaction and eventually reach a price, a transaction in correct market price will take place. According to the arm's length principle, the price at which the transaction occurs is preferred for tax purposes, as it is a fair reflection of the value of the goods or services.^[2]

However, when the parties that negotiate a transaction are related, they may set an artificially lower price with the intention to minimise their taxes. Because of these tax benefits, transfer mispricing is favored by a majority of large enterprises.^[3]