The Essence of Transfer Pricing Mechanism and Risks of International Companies Arising with its Use

Abstract

Today companies, including international ones function in harsh conditions of external instability, thus they try to optimize their financial results in different ways. One of them is mechanism of transfer pricing, which gives an opportunity to redistribute cash flows inside the company and thus to minimize taxes to state and to optimize final finance result. The article discusses the essence of the mechanism of transfer pricing used by international companies and identifies external and internal goals of its use. The author studies legislative base of transfer pricing, analyzes the current methods applied to control deals between interdependent persons, finds their key characteristics and possibility of use. It was found out that transfer pricing is subject to strict control on the part of tax bodies and it can lead to serious finance risks of companies. They are risks arising directly in case mechanism of transfer pricing is used and risks of insufficient, ‘thin’ capitalization. Taking these indicators into account can help forecast and later minimize potential finance risks of the company.