Transfer pricing is one of the most important issues in international tax.
“Transfer pricing is the leading edge of what is wrong with international tax”
– Lee Sheppard, Tax Analysts, August 2012
Transfer pricing happens whenever two companies that are part of the same multinational group trade with each other: when a US-based subidiary of Coca-Cola, for example, buys something from a French-based subsidiary of Coca-Cola. When the parties establish a price for the transaction, this is transfer pricing.
Transfer pricing is not, in itself, illegal or necessarily abusive. What is illegal or abusive is transfer mispricing, also known as transfer pricing manipulation or abusive transfer pricing. (Transfer mispricing is a form of a more general phenomenon known as trade mispricing, which includes trade between unrelated or apparently unrelated parties – an example is reinvoicing.)
It is estimated that about 60 percent of international trade happens within, rather than between, multinationals: that is, across national boundaries but within the same corporate group. Suggestions have been made that this figure may be closer to 70 percent.
Estimates vary as to how much tax revenue is lost by governments due to transfer mispricing. Global Financial Integrity in Washington estimates the amount at several hundred billion dollars annually. A March 2009 Christian Aid report estimated $1.1 trillion in bilateral trade mispricing into the EU and the US alone from non-EU countries from 2005 to 2007. The “Magnitudes ” section of our website contains a range of estimates and data.
Credits to http://www.taxjustice.net/topics/corporate-tax/transfer-pricing/