What is Intercompany Transfer Pricing? Key Methods, Rules & Software

April 11, 2025

In today’s global economy, multinational businesses rely on a complex web of intercompany transactions — exchanging goods, services, intellectual property, and more. These internal exchanges impact everything from income tax exposure to performance management. At the center of it all is transfer pricing — the process of setting prices for transactions between related entities.

Properly managing your transfer price strategy is essential to avoid double taxation, ensure regulatory compliance, and align with strategic financial goals. But many companies still rely on outdated, manual processes that make accuracy and auditability difficult.

This practical guide brings together everything you need to know about transfer pricing — from rules and methods to real-world examples and the software that makes it all easier. Whether you’re navigating intercompany transfer pricing or evaluating automation options, this is your one-stop resource.

What is Intercompany Transfer Pricing?

Intercompany Transfer pricing involves setting the cost for goods and services sold between related business entities within the same corporate group. For instance, when a subsidiary company provides goods or services to its parent company or another subsidiary within the same group, the price set for these transactions is known as the transfer price.

Businesses rely on transfer pricing to ensure that transaction pricing between related parties is comparable to fair market value. This process, which is conducted according to the transfer pricing guidelines set by the Organization for Economic Cooperation and Development (OECD), requires the governing entity in this transaction to choose a pricing method that offers the best estimation of this fair market value.

The Role of Intercompany Transfer Pricing in Global Business

The purpose and role of intercompany transfer pricing is to ensure that each company in a group earns a fair return on its investment, taking into account risk and the cost of capital. In practice, setting transfer prices involves complex economic analyses and documentation, taking into account various factors such as market conditions, business strategies, and the specific roles and responsibilities of each entity involved. Global, multinational companies must carefully balance these considerations to comply with regulations, manage financial performance, and avoid disputes with tax authorities.

Transfer prices are typically reviewed on a regular basis to ensure that they remain fair and accurate. If a company believes that its transfer prices are not fair, it may negotiate with the other companies involved to reach a new agreement.

What’s the Difference Between Operational and Intercompany Transfer Pricing?

While the terms are closely related, operational transfer pricing and intercompany transfer pricing serve different purposes within a global organization.

How Intercompany Transfer Pricing Works: A Breakdown

Intercompany Transfer Pricing involves setting prices for transactions between subsidiaries of the same multinational corporation to ensure these transactions comply with the arm’s length principle, aiming to prevent tax evasion and profit shifting. It requires meticulous documentation and adherence to international and local tax laws, with methods and strategies scrutinized by tax authorities to ensure fairness and transparency. To get a closer look, we’ve broken down the transfer pricing process below:

1. Setting Transfer Prices

First, companies set prices for goods, services, or intellectual property traded between their divisions in different countries. These prices are determined using various methods, including comparable uncontrolled price, resale price, cost plus, profit split, and transactional net margin methods, depending on what’s most appropriate for the transaction type.

2. Regulatory Compliance

Transfer pricing is heavily regulated by tax authorities worldwide to prevent profit shifting and tax avoidance. Companies must comply with the transfer pricing rules established by the countries in which they operate, adhering to the arm’s length principle to ensure transactions are priced as if they were between unrelated parties.

3. Documentation and Reporting

Enterprises must next prepare extensive documentation to justify their transfer pricing policies. This documentation often includes detailed descriptions of intercompany transactions, the methods used to set prices, and the rationale for their selection. The aim is to provide tax authorities with transparency into how prices are determined, ensuring compliance with local laws.

4. Adjustments and Disputes

Then, if tax authorities determine that transfer prices do not comply with the arm’s length principle, they may adjust a company’s taxable income, leading to additional tax liabilities, penalties, and interest. Companies may dispute these adjustments through appeals or litigation, or they may seek to resolve disputes through mutual agreement procedures (MAP) under tax treaties.

5. Strategic Planning

Beyond compliance, transfer pricing is a strategic tool for global businesses. It can influence where profits are reported, affecting overall tax efficiency and strategic investment decisions. Lastly, companies must balance compliance, tax strategy, and operational efficiency when setting their transfer pricing policies.

Transfer Pricing: Best Practices for Compliance and Efficiency

In recent years, multinational enterprises (MNEs) have been the subject of intense public and media scrutiny with respect to their use of transfer pricing. This has led to an increased focus by tax authorities on transfer pricing compliance and a greater level of scrutiny of MNEs’ transfer pricing practices.

In response to this increased scrutiny, many MNEs have adopted best practices with respect to their transfer pricing. These best practices generally fall into three categories: 

1. Documentation
2. Process
3. Substance

1. Documentation

The first category, documentation, relates to the level of detail and analysis required in a transfer pricing study. In order to meet the increased level of scrutiny from tax authorities, MNEs should ensure that their transfer pricing documentation is comprehensive and includes a detailed analysis of the economic factors underlying the pricing of the transaction.

In addition, MNEs should consider adopting a “master file” approach to their documentation. This approach involves creating a central repository for all transfer pricing documentation which can be easily accessed by tax authorities. This approach has the advantage of simplifying the process of providing transfer pricing documentation to tax authorities and reducing the risk of providing incomplete or inaccurate information.

2. Process

The second category, process, relates to the procedures and processes used by MNEs to arrive at their transfer prices. In order to meet the increased level of scrutiny from tax authorities, MNEs should ensure that their transfer pricing processes are robust and defensible.

MNEs should consider adopting a “bottom-up” approach to transfer pricing. This approach involves starting with an analysis of the underlying economic factors driving the pricing of the transaction and then working up to a transfer price that is consistent with those economic factors. This approach has the advantage of providing a more comprehensive and accurate analysis of the transaction and reducing the risk of transfer pricing manipulation.

3. Substance

The third category, substance, relates to the substantive content of the transfer pricing arrangement. In order to meet the increased level of scrutiny from tax authorities, MNEs should ensure that their transfer pricing arrangements have a sound economic basis and are consistent with the underlying economic factors driving the pricing of the transaction.

MNEs should also consider adopting an “arm’s length” approach to transfer pricing. This approach involves setting prices that would be charged by unrelated parties in comparable circumstances. This approach has the advantage of providing a more objective and unbiased transfer price.

The increased level of scrutiny from tax authorities has led many MNEs to adopt best practices with respect to their transfer pricing. These best practices generally fall into three categories: 

1. Documentation
2. Process 
3. Substance. 

By adopting these best practices, MNEs can improve their transfer pricing compliance and reduce the risk of transfer pricing manipulation.

Keeping Up with Transfer Pricing Rules

Transfer pricing is a complex area, and beyond best practices, there are rules and regulations that govern how it should be done. In general, prices should be set in a way that is arm’s length, meaning that they should be similar to what would be charged between two unrelated companies. However, there are many factors that can come into play when determining the appropriate price, and it is not always easy to ensure that prices are fair and reasonable.

As global trade increases, and more companies expand their operations into different countries, transfer pricing has become a hot-button issue. Many governments are concerned about companies using transfer pricing to shift profits out of their countries, and they are taking steps to crack down on these practices.

If you are involved in international transfer pricing, it is important to stay up-to-date on the latest rules and regulations. Failure to comply with the rules can result in hefty penalties, and it can damage your company’s reputation.

OECD Transfer Pricing

The OECD transfer pricing rules are a set of international guidelines that member countries use to determine the prices that related parties charge each other for goods and services. The rules are designed to ensure that related parties do not shift profits from one country to another by artificially setting prices.

The OECD transfer pricing rules are used by more than 100 countries, including all OECD member countries. The rules are constantly being updated to reflect changes in the global economy and the development of new technologies.

The OECD transfer pricing rules are divided into three main sections:

1. The Arm’s Length Principle
2. Methods for determining arm’s length prices
3. Documentation and disclosure requirements

The Arm’s Length Principle is the cornerstone of the OECD transfer pricing rules. It states that related parties must charge each other prices that would be charged by independent parties. This principle is based on the idea that unrelated parties engage in transactions with the goal of maximizing their own profits.

There are four methods that can be used to determine arm’s length prices:

1. The Comparable Uncontrolled Price Method
2. The Resale Price Method
3. The Cost Plus Method
4. The Profit Split Method

The Comparable Uncontrolled Price Method is the most commonly used method. It involves finding prices charged by unrelated parties for similar products or services.

The Resale Price Method is used when related parties are engaged in a resale transaction. This method involves determining the arm’s length price by adding a markup to the price charged by the supplier.

The Cost Plus Method is used when related parties are engaged in a production or service transaction. This method involves determining the arm’s length price by adding a markup to the cost of the production or service.

The Profit Split Method is used when related parties are engaged in a transaction where they share the risks and rewards of the venture. This method involves splitting the profits of the venture in an arm’s length manner.

As one last note, the OECD transfer pricing rules are an important part of the global tax system. They ensure that related parties do not shift profits from one country to another by artificially setting prices. Related parties must keep detailed records of their transactions and disclose their transfer pricing arrangements to the tax authorities.

Real-World Intercompany Transfer Pricing Examples

An example of intercompany transfer pricing would be where two companies within the same group transfer goods or services to each other at an agreed price. This price may be higher or lower than the market price, but it is set between the two companies in order to help them manage their overall tax bill. To help you better understand intercompany transfer pricing, here are two real-world examples.

Example #1: Coca-Cola

Because the production and sales of Coca-Cola are conducted across global markets, the company has to legally defend its $3.3 billion transfer pricing of a royalty agreement. The company transferred IP value to affiliates between 2007 and 2009. The IRS and Coca-Cola continue to litigate the case, it is still being heard in court.

Intercompany Transfer pricing is a way for companies to shift profits from one country to another, typically to a lower-tax jurisdiction. It can also be used to help companies avoid tariffs. In some cases, transfer pricing can be used to exploit loopholes in tax laws.

Example #2: Medtronic

Medical device manufacturer and inventor of the pacemaker, Medtronic, used to be headquartered in Minneapolis. After moving their primary business to Ireland, Medtronic and the IRS have been litigating in court since 2021 to try to settle a dispute of $1.4 billion.

The IRS has accused Medtronic of transferring intellectual property to low-tax havens globally. The transfer involves the value of intangible assets between Medtronic and its Puerto Rican affiliate for the tax years 2005 and 2006.

A lower court had originally sided with Medtronic, but the IRS filed an appeal. Both sides are still awaiting a judgment from the Tax Court.

How Modern Intercompany Transfer Pricing Software Supports Global Compliance

No matter which transfer pricing method you use, the process is data-intensive. Enterprises need transfer pricing tools that improve the strength of their calculations and alleviate the manual burdens of this transfer pricing accounting process. Software-based transfer pricing also allows you to monitor the success of each pricing method you use, and gather insights to help you guide your transfer pricing method strategy going forward.

This is especially true given the guidance from OECD BEPS, scrutiny from Revenue Authorities, along with increased public scrutiny and the reputational risk that comes with transfer pricing that appears to be blatantly tax-avoidant.

Transfer pricing solutions like Longview allow you to effectively manage large volumes of data. With all of your company’s data collected within a single source, you can streamline your tax activities, have confidence in your data, increase intercompany transparency, and reduce operational costs and risk.

Here are a few more ways that transfer pricing software like Longview can benefit your business:

• Cloud-based software, you can stay up to date with real-time adjustments and view data quickly and accurately. 
• Advanced automation to increase your efficiency and strengthen your data integrity.
• Provide fast yet precise processing, even with large volumes of data.
• Better understanding of your company’s tax data to improve compliance and standardized protocols.
• Increased data visibility so you can adjust your transfer pricing strategy as the market environment and tax regulations change.

Make the Change in Your Intercompany Transfer Pricing with Longview

Intercompany Transfer pricing is an integral piece of the tax puzzle that can significantly reduce the annual tax burden for multinational corporations. Although transfer pricing represents a complex and sometimes risky endeavor, advanced software solutions provide an easy, cost-effective tool that can help you optimize your transfer pricing process. 

Dedicated transfer pricing software improves not only your management of your transfer pricing practices, but also your overall financial and tax management strategies. Here’s what you gain with Longview Transfer Pricing:

• Global Consistency: A centralized framework ensures uniform transfer pricing across all entities.
• Operational Efficiency: Reduce manual work with automation and standardized calculations.
• Actionable Insights: Gain visibility into profitability gaps early — before period close.

Strategic Execution: Align policy with real-time operations to minimize risk and improve compliance.