What is the recommended approach to establish fair transfer pricing?

Establishing fair transfer pricing is crucial in ensuring compliance with international regulations and maintaining equity in transactions between related entities within a multinational corporation. The recommended approach involves setting prices at a rate similar to those charged to unrelated parties, which is based on the principle of "arm's length." This principle ensures that the transfer prices reflect market conditions and are comparable to similar transactions conducted between unrelated businesses.

By using this method, businesses can justify their pricing structure to tax authorities and avoid penalties associated with transfer pricing disputes. It creates a fair allocation of income and expenses, thus maintaining the integrity of financial reporting and tax obligations across different jurisdictions. Establishing prices in line with market rates helps mitigate risks related to tax audits and reassessments that could arise from pricing perceived as non-compliant with market norms.