Transfer mispricing, also known as transfer pricing manipulation or fraudulent transfer pricing, 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.
This article duplicates the scope of other articles. (August 2018)
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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.
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.