Transfer Pricing
Definition
The rules governing the prices charged between related entities across borders, requiring them to reflect what independent parties would agree (the arm's-length principle), so profit is not shifted artificially to low-tax jurisdictions.
Related Terms in International Tax
Permanent Establishment
A fixed place of business, or a dependent agent, through which a foreign enterprise carries on business in a country, generally creating a taxable presence there under tax treaties.
VAT
Value Added Tax, a consumption tax charged at each stage of supply where businesses collect tax on sales and reclaim tax on purchases, so the net burden falls on the final consumer. Used across the UK, the EU, the Gulf and much of the world; India and Canada run GST variants of the same mechanism.
Input VAT
VAT a business pays on its purchases and expenses, generally recoverable against the VAT it charges on sales provided the purchase relates to taxable supplies and a valid tax invoice is held. Non-business and exempt-related purchases are typically blocked.
Output VAT
VAT a business charges its customers on taxable sales and must account for to the tax authority. The amount payable each period is output VAT less recoverable input VAT; where input exceeds output, a refund position arises.
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