What is transfer pricing in simple terms?

Transfer pricing is the price one part of a company charges another part of the same company for goods, services, intellectual property, or loans. When two related entities in a corporate group transact, especially across borders, the price is set internally rather than negotiated between strangers. Tax authorities care about that price because it shifts profit between jurisdictions and therefore tax. The core rule is the arm's length principle: related parties must price the transaction as unrelated parties would have. Lightbridge ERP helps groups configure intercompany pricing and markups in the ERP so these transactions post consistently across entities.

What is the arm's length principle in transfer pricing?

The arm's length principle is the international standard for transfer pricing. It holds that the price of a transaction between related entities should be the same as the price that independent, unrelated parties would have agreed to under comparable conditions. The idea is that pricing inside a group should not be used to move profit artificially to a lower-tax jurisdiction. The OECD Transfer Pricing Guidelines build on this principle, and in the United States the arm's length standard is embodied in IRC Section 482 and its Treasury Regulations. Every transfer pricing method exists to estimate or test that arm's length result.

What are the five OECD transfer pricing methods?

The OECD Transfer Pricing Guidelines recognize five methods. The comparable uncontrolled price (CUP) method compares the related-party price to a price between independent parties. The resale price method starts from the resale price to an independent customer and subtracts an arm's length gross margin. The cost plus method adds an arm's length markup to costs. The transactional net margin method (TNMM) tests the net profit margin against comparable independent transactions. The profit split method divides the combined profit based on each entity's contribution. The first three are traditional transaction methods and the last two are transactional profit methods; the most appropriate method for the facts is selected.

What governs transfer pricing in the US and internationally?

Internationally, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations set out the arm's length principle and the accepted methods, and most countries align their rules with them. In the United States, transfer pricing is governed by Internal Revenue Code Section 482 and its detailed Treasury Regulations, which authorize the IRS to allocate income among commonly controlled entities to reflect an arm's length result. The two frameworks are broadly consistent on the arm's length standard, though specific method preferences and documentation requirements vary by country. Groups operating in several jurisdictions must satisfy each jurisdiction's rules.

What documentation does BEPS Action 13 require?

BEPS Action 13, part of the OECD and G20 Base Erosion and Profit Shifting project, introduced a three-tiered standardized approach to transfer pricing documentation. The master file gives a high-level overview of the multinational group: its structure, business, intangibles, financing, and overall transfer pricing policies. The local file provides detailed information on the specific related-party transactions of the local entity, including the method and comparables used. Country-by-country reporting requires large groups to report revenue, profit, tax, and other indicators for each jurisdiction in which they operate. Together these give tax authorities the information to assess transfer pricing risk.

Why does transfer pricing matter and what is an APA?

Transfer pricing matters because it determines how a multinational group's profit, and therefore its tax, is split across jurisdictions. Getting it wrong creates real exposure: tax authorities can adjust the pricing, assess additional tax, and impose penalties, and an adjustment in one country without a corresponding relief in another can lead to double taxation of the same profit. To reduce uncertainty, a group can negotiate an advance pricing agreement (APA) with one or more tax authorities, which fixes an agreed transfer pricing method for future years. Strong documentation and consistent intercompany posting are the practical defenses against disputes.

How does Lightbridge ERP help with transfer pricing?

Lightbridge ERP is an independent, vendor-neutral ERP advisory firm with deep in-house finance expertise across intercompany, multi-book accounting, and multi-entity consolidation. It helps groups configure intercompany pricing and markups in the ERP so related-party transactions post consistently across entities and currencies, with the supporting transaction detail available for documentation. Lightbridge configures the system to execute the policy your tax advisors set; it does not provide tax advice. Because Lightbridge accepts no vendor kickbacks, no reseller quotas, and no partner-tier incentives, its platform advice is driven by fit rather than commission. This guide is general information, not accounting, tax, or legal advice; confirm treatment with your tax advisor.

JH Written by Jully Hayasaka with Robert LabardeeNetSuite Advanced Accounting Lead and Founder and CEO

Last updated June 2026.

What is transfer pricing?

Lightbridge ERP defines transfer pricing as the pricing of transactions in goods, services, intellectual property, and loans between related entities in a corporate group, especially across tax jurisdictions. Tax authorities require these related-party prices to follow the arm's length principle, meaning the parties should price as unrelated parties would in comparable circumstances.

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Transfer pricing is the price set on transactions between related entities.

Transfer pricing is the pricing of transactions in goods, services, intellectual property, and loans between related entities within a single corporate group. When one subsidiary sells components to another, licenses a brand to an affiliate, or lends cash across borders, the price is set internally rather than negotiated between independent parties. That internal price is the transfer price, and it determines how profit, and therefore tax, is divided between the entities and the jurisdictions they sit in.

Because related-party prices can shift profit toward lower-tax jurisdictions, tax authorities require that they follow the arm's length principle: the price must be what independent, unrelated parties would have agreed to under comparable conditions. Transfer pricing rules exist to test that standard, and the choice of method is how a group estimates or defends an arm's length result for a given transaction.

This guide is general information for finance and operations leaders, not accounting, tax, or legal advice. Confirm specific treatment with your tax advisor.

Transfer pricing follows from related entities transacting across jurisdictions.

The mechanics of transfer pricing follow a consistent pattern: related entities transact, the arm's length standard sets the benchmark, a method establishes or tests the price, and documentation supports it on audit. These four steps sit behind every defensible intercompany price.

Related entities transact

Companies in one corporate group sell goods, provide services, license intellectual property, or lend money to each other. Because the parties are related, the price is set internally rather than negotiated at arm's length.

The arm's length standard applies

Tax authorities require that related-party prices match what independent parties would agree to in comparable circumstances. This arm's length standard is the benchmark against which every intercompany price is tested.

A method sets the price

A transfer pricing method, chosen from the OECD set, establishes or tests the arm's length price using comparable transactions, margins, or a split of combined profit. The most reliable method for the facts is selected.

Documentation supports it

The group documents its method, comparables, and analysis so it can defend the pricing on audit. Under BEPS Action 13 this includes a master file, local files, and country-by-country reporting.

A worked example shows how a transfer price is tested.

Suppose a manufacturing subsidiary in one country produces a product for 80 dollars per unit and sells it to a distribution affiliate in another country, which then resells it to independent customers for 100 dollars. The question for transfer pricing is what price the manufacturer should charge the affiliate, because that price splits the 20 dollars of group margin between the two jurisdictions.

Under the cost plus method, the group adds an arm's length markup, say 25 percent, to the 80 dollar cost, setting the intercompany price at 100 dollars. But here that would leave the distributor no margin, so the resale price method is more natural: start from the 100 dollar resale price and subtract an arm's length gross margin for a comparable independent distributor, say 15 percent, giving a transfer price of about 85 dollars. The method that most reliably reflects comparable independent dealings governs. The supporting comparables and analysis are then documented, as covered next.

The OECD recognizes five transfer pricing methods.

The OECD Transfer Pricing Guidelines set out five methods for establishing or testing an arm's length price. The first three are traditional transaction methods and the last two are transactional profit methods. The most appropriate method for the specific facts and the available comparable data is selected, rather than a fixed hierarchy.

Comparable uncontrolled price (CUP)

Compares the price charged in a related-party transaction to the price charged in a comparable transaction between independent parties. CUP is the most direct method when reliable comparable prices exist.

Resale price and cost plus

The resale price method works back from the price to an independent customer using an arm's length gross margin. The cost plus method adds an arm's length markup to the supplier costs. Both are traditional transaction methods.

Transactional net margin method (TNMM)

Tests the net profit margin a party earns on a controlled transaction against the net margin earned in comparable uncontrolled transactions. TNMM is widely used because reliable net-margin comparables are often easier to find.

Profit split

Allocates the combined profit from related-party transactions between the entities based on their relative contributions. Profit split fits highly integrated operations or transactions involving valuable unique intangibles on both sides.

OECD Guidelines, IRC Section 482, and BEPS Action 13 govern transfer pricing.

Internationally, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations articulate the arm's length principle and the accepted methods, and most countries align their domestic rules with them. In the United States, transfer pricing is governed by Internal Revenue Code Section 482 and its Treasury Regulations, which let the IRS allocate income among commonly controlled entities to clearly reflect an arm's length result. The two frameworks are broadly consistent on the arm's length standard, though method preferences and penalties differ by country.

Documentation is governed by BEPS Action 13, which introduced a three-tiered approach: a master file describing the group, local files detailing each entity's related-party transactions, and country-by-country reporting of revenue, profit, and tax by jurisdiction for large groups. Getting transfer pricing wrong creates penalty exposure and the risk of double taxation, which an advance pricing agreement (APA) with the relevant tax authorities can reduce. Because transfer pricing rides on intercompany transactions across entities, the Lightbridge ERP guides to intercompany accounting and multi-entity accounting cover the surrounding mechanics.

Lightbridge ERP configures intercompany pricing inside your ERP.

A transfer pricing policy only holds up if the intercompany transactions actually post the way the policy says they should, across every entity and currency in the group. Lightbridge ERP is an independent, vendor-neutral ERP advisory firm with deep in-house finance expertise across intercompany, multi-book accounting, and multi-entity consolidation. It configures intercompany pricing and markups in the ERP so related-party transactions post consistently, with the underlying detail available to support documentation. Lightbridge executes the policy your tax advisors set; it does not provide tax advice.

Because Lightbridge accepts no vendor kickbacks, no reseller quotas, and no partner-tier incentives, its platform advice is driven by fit rather than commission. For how a specific platform handles intercompany flows across a group, NetSuite OneWorld shows the product-level mechanics, while ERP consulting and a structured selection are the right starting point when the underlying system still needs to be chosen.

Transfer pricing: frequently asked questions

What is transfer pricing in simple terms?: Transfer pricing is the price one part of a company charges another part of the same company for goods, services, intellectual property, or loans. When two related entities in a corporate group transact, especially across borders, the price is set internally rather than negotiated between strangers. Tax authorities care about that price because it shifts profit between jurisdictions and therefore tax. The core rule is the arm's length principle: related parties must price the transaction as unrelated parties would have. Lightbridge ERP helps groups configure intercompany pricing and markups in the ERP so these transactions post consistently across entities.
What is the arm's length principle in transfer pricing?: The arm's length principle is the international standard for transfer pricing. It holds that the price of a transaction between related entities should be the same as the price that independent, unrelated parties would have agreed to under comparable conditions. The idea is that pricing inside a group should not be used to move profit artificially to a lower-tax jurisdiction. The OECD Transfer Pricing Guidelines build on this principle, and in the United States the arm's length standard is embodied in IRC Section 482 and its Treasury Regulations. Every transfer pricing method exists to estimate or test that arm's length result.
What are the five OECD transfer pricing methods?: The OECD Transfer Pricing Guidelines recognize five methods. The comparable uncontrolled price (CUP) method compares the related-party price to a price between independent parties. The resale price method starts from the resale price to an independent customer and subtracts an arm's length gross margin. The cost plus method adds an arm's length markup to costs. The transactional net margin method (TNMM) tests the net profit margin against comparable independent transactions. The profit split method divides the combined profit based on each entity's contribution. The first three are traditional transaction methods and the last two are transactional profit methods; the most appropriate method for the facts is selected.
What governs transfer pricing in the US and internationally?: Internationally, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations set out the arm's length principle and the accepted methods, and most countries align their rules with them. In the United States, transfer pricing is governed by Internal Revenue Code Section 482 and its detailed Treasury Regulations, which authorize the IRS to allocate income among commonly controlled entities to reflect an arm's length result. The two frameworks are broadly consistent on the arm's length standard, though specific method preferences and documentation requirements vary by country. Groups operating in several jurisdictions must satisfy each jurisdiction's rules.
What documentation does BEPS Action 13 require?: BEPS Action 13, part of the OECD and G20 Base Erosion and Profit Shifting project, introduced a three-tiered standardized approach to transfer pricing documentation. The master file gives a high-level overview of the multinational group: its structure, business, intangibles, financing, and overall transfer pricing policies. The local file provides detailed information on the specific related-party transactions of the local entity, including the method and comparables used. Country-by-country reporting requires large groups to report revenue, profit, tax, and other indicators for each jurisdiction in which they operate. Together these give tax authorities the information to assess transfer pricing risk.
Why does transfer pricing matter and what is an APA?: Transfer pricing matters because it determines how a multinational group's profit, and therefore its tax, is split across jurisdictions. Getting it wrong creates real exposure: tax authorities can adjust the pricing, assess additional tax, and impose penalties, and an adjustment in one country without a corresponding relief in another can lead to double taxation of the same profit. To reduce uncertainty, a group can negotiate an advance pricing agreement (APA) with one or more tax authorities, which fixes an agreed transfer pricing method for future years. Strong documentation and consistent intercompany posting are the practical defenses against disputes.
How does Lightbridge ERP help with transfer pricing?: Lightbridge ERP is an independent, vendor-neutral ERP advisory firm with deep in-house finance expertise across intercompany, multi-book accounting, and multi-entity consolidation. It helps groups configure intercompany pricing and markups in the ERP so related-party transactions post consistently across entities and currencies, with the supporting transaction detail available for documentation. Lightbridge configures the system to execute the policy your tax advisors set; it does not provide tax advice. Because Lightbridge accepts no vendor kickbacks, no reseller quotas, and no partner-tier incentives, its platform advice is driven by fit rather than commission. This guide is general information, not accounting, tax, or legal advice; confirm treatment with your tax advisor.

From understanding transfer pricing to posting it consistently.

When the question shifts from what transfer pricing is to how your ERP should post intercompany transactions across entities, Lightbridge ERP configures the system to execute your policy, consistent and audit-ready.

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