Transfer pricing refers to the pricing of goods, services, funds, and tangible and intangible assets transferred within a group, and between connected parties. Since the prices are set with the mutual agreement of the parties, they are not subject to normal market pressures that establish prices for similar transactions between third parties.
Transfer pricing rules in the UK and elsewhere require that transactions between connected parties should be recognised for tax purposes by applying the amount of profit that would have arisen if the same transaction had been carried out by unconnected parties. This is referred to as the 'arm's length principle'. The arm's length principle is endorsed by the OECD (Organisation for Economic Co-operation and Development) and enshrined in the Associated Enterprises Article of the OECD Model Tax Convention.