What is the purpose of transfer pricing rules?

The primary purpose of transfer pricing rules is to govern the pricing of goods and services between related parties, particularly when these parties are located in different tax jurisdictions. This is crucial for ensuring that transactions between affiliated entities are conducted at arm's length, meaning that the prices should reflect what independent entities would agree upon in similar circumstances.

Governments implement transfer pricing regulations to prevent tax avoidance strategies that can occur when companies manipulate prices to shift profits to jurisdictions with lower tax rates. By establishing clear guidelines on how to set these prices, transfer pricing rules aim to ensure fair taxation based on the economic realities of the transactions. This helps maintain tax fairness and integrity in international trade while preventing base erosion and profit shifting.

In contrast, other options do not capture the essence of transfer pricing correctly. Setting fixed prices for all goods and services is impractical and does not align with market dynamics. Determining pricing between unrelated parties is outside the scope of transfer pricing, which specifically addresses related entities. Eliminating taxes on goods sold internationally misconstrues the purpose of these rules, as they are designed to establish appropriate taxation rather than eliminate tax obligations.