Every week, I speak with international founders who own companies in multiple countries and move money between them.

And a surprising number of them are sitting on a massive tax risk without realizing it.

They are doing everything right operationally. They have multiple entities, international teams, global customers, and strong margins. But when it comes to how money moves between their companies, there is often little to no documentation.

That risk has a name. Transfer pricing.

In this article, I want to explain transfer pricing in plain English, why it matters, who actually needs to care, and how ignoring it can turn into one of the most expensive mistakes a global business can make.

What Is Transfer Pricing in Simple Terms

Transfer pricing is how transactions are priced between related companies.

If you own more than one company and those companies do business with each other, the prices they charge are not arbitrary. Governments expect those transactions to be priced exactly as if the companies were unrelated third parties.

This concept is known as the arm’s length principle.

Tax authorities do not care that you own both companies. They care that profits are not being artificially shifted out of high tax jurisdictions without justification.

If the pricing is not supported, the tax authority will reprice the transaction for you. And they will not do it in your favor.

Why Transfer Pricing Becomes Dangerous Very Quickly

Many founders do not set out to break the rules. What usually happens is this:

A company operates in a high tax country.

Another company owned by the same founder exists in a lower tax country.

Money starts flowing between them for services, goods, licensing, or management fees.

On paper, profits in the high tax country drop. Cash moves elsewhere. Everything feels efficient.

Until there is an audit.

When an audit happens, tax authorities can go back multiple years. They will review every related party transaction. If pricing cannot be justified, they can assess additional tax, penalties, and interest across all open years.

That is how businesses get crushed.

Audits are rare. But when they happen, they are comprehensive and retroactive.

What a Transfer Pricing Study Actually Does

A transfer pricing study is documentation that justifies how related party transactions are priced.

It is not a guess. It is not a memo written after the fact.

A proper study analyzes:

• How each company operates
• What functions are performed in each country
• Who takes risk
• Who owns intellectual property
• What comparable third party transactions look like

Using accepted methodologies under US regulations and OECD guidelines, the study determines what an arm’s length price should be.

That documentation is your leverage in an audit.

Without it, you are negotiating with nothing in your back pocket.

When Transfer Pricing Matters Most

Not everyone needs a transfer pricing study.

If you are a non resident with a US LLC and your income is not subject to US tax, transfer pricing is often less relevant. The risk profile is lower.

However, transfer pricing becomes critical when:

• You own a US corporation paying US tax
• You move profits to another company you own
• You manufacture, source, or license goods internationally
• You pay related parties for services or management
• You are scaling and transaction amounts are increasing

This is especially important for high margin businesses. Ecommerce, SaaS, consulting, manufacturing, and IP driven companies are common targets.

The more profit involved, the more scrutiny you invite.

Why You Cannot Fix Transfer Pricing After an Audit

One of the most dangerous misconceptions is thinking transfer pricing can be fixed later.

It cannot.

Studies created after the audit begins carry little weight. Tax authorities view them as self-serving and reactive.

Transfer pricing documentation must exist before the audit.

That is why this is about defense, not aggression.

Transfer Pricing Is About Protection, Not Just Taxes

Many founders think transfer pricing is about aggressive tax planning.

It is not.

Proper transfer pricing is about:

• Tax optimization
• Risk minimization
• Audit defense
• Avoiding double taxation
• Audits are negotiations. Negotiations require leverage. Documentation creates leverage.

Without it, the tax authority decides where profits belong. And you pay accordingly.

Real World Example Where This Matters

Imagine a US corporation selling products at high margins. It pays a related foreign company for manufacturing or services.

If the IRS decides those payments are inflated, they will reallocate profits back to the US entity. That means back taxes, penalties, and interest.

Now imagine this happening across eight or ten years.

This is not theoretical. I have seen it happen.

Luxury goods manufacturing, ecommerce brands, and global service companies are particularly exposed.

Transfer Pricing and Unrelated Parties

Transfer pricing is not limited to companies that are directly related.

If two companies are owned by the same individual, transfer pricing applies.

Even transactions with friends, family members, or entities with overlapping ownership can raise red flags if pricing is excessive or unjustified.

Large payments always deserve scrutiny. Especially when they reduce taxable income in one jurisdiction.

The Cost Versus the Risk

Many founders delay transfer pricing because of perceived cost.

In reality, most studies are reasonably priced relative to the protection they provide. Especially for businesses generating meaningful profits.

Compared to the cost of an audit gone wrong, a transfer pricing study is inexpensive insurance.

How We Help Clients Do This the Right Way

For clients operating internationally, we help:

Structure transactions correctly from day one

Identify when transfer pricing is actually required

Coordinate with experienced transfer pricing specialists

Reduce tax exposure while staying compliant

Avoid catastrophic audit outcomes

This is not about stripping profits blindly. It is about doing it the right way, with defensible documentation.

Final Thoughts

If you are moving money between companies you own, transfer pricing is not optional strategy. It is protection.

You can legally move profits across borders. But if you do not justify how and why, tax authorities will impose their own version later.

And that version is always more expensive.

If you want to understand whether transfer pricing applies to your situation, or if you want help structuring things correctly before there is a problem, you can schedule a call with our team.

Address it correctly now and you avoid bigger problems later.