What is the purpose of transfer pricing review in intercompany real estate transactions?

• A. Ensure terms reflect arm's length and elimination on consolidation; risks include overstatement of revenue, misallocation of costs, non-arm's-length terms.
• B. Aim to maximize internal profits irrespective of arm's length.
• C. Transfer pricing is irrelevant to audits.
• D. Only external transactions matter.

Answer: (A)

In intercompany real estate transactions, the essential purpose of a transfer pricing review is to verify that prices charged between related entities reflect what independent, unrelated parties would agree (arm’s length principle) and to ensure those intercompany results are handled correctly in consolidation. This helps prevent shifting profits to different entities or jurisdictions and avoids distortions in the group’s financial statements.

Why this is the best answer: it explicitly ties pricing to market-based terms and to the consolidation process, acknowledging that intercompany deals must be priced as if the entities were independent and that the related revenues and costs are properly eliminated or adjusted in consolidation. It also points to the common risks auditors look for—overstatement of revenue, misallocation of costs, and terms that are not at arm’s length—highlighting why a careful transfer pricing review is important for accurate financial reporting and tax compliance.

Other choices miss the mark because they ignore the arm’s length requirement, suggest maximizing internal profits regardless of market reality, claim transfer pricing isn’t relevant to audits, or state that only external transactions matter—none of which align with how real estate groups are audited and consolidated.