Transfer pricing is the terminology used to describe controlled transactions between two or more organizations. Controlled means any kind of control regardless of whether the control is direct or indirect or legally enforceable. When two or more organizations are in any way controlled by the same interests, transactions between them are subject to transfer pricing rules to clearly reflect income and expenses for each organization and prevent tax evasion. Transfer pricing rules require that organizations price goods and services as if the transactions were between unrelated parties in an arm's length transaction. Companies are often tempted to aggressively price products and services when there is an economic benefit, such as a lower tax rate, in one country over another. However, since transfer pricing rules are present in each country, the methodology for pricing goods and services can be challenged on either side of the transaction. There is not a requirement that US entities report their transfer pricing methodology when filing their annual income tax return. However, there is a requirement that entities be able to justify their methodology and pricing, if audited. If you have questions regarding transfer pricing or would like to discuss this and the required documentation required for your pricing model, please contact our office.