Transfer Pricing in taxation purview
- 1. TRANSFER PRICING IN TAXATION PURVIEW JIMSHAD AHAMMED K AJMAL HAKHIM V M.COM (A&T)
- 2. TRANSFER PRICE The price of goods/services which is used in accounting for transfer of goods or services from one responsibility centre to another or from one company to another associated company. Eg: XYZ Co. is expert in providing electrical and electronic services. It is engaged in providing support to its associated company as well as it is engaged in outsourcing contract. If XYZ Co. provides some services to its associated company, the transaction should be accounted at price calculated using transfer price mechanism.
- 3. WHY TRANSFER PRICING Rise of intra group trade – including highly complex international transactions involving intangibles and multi-tiered services MNC transaction structure determined not only by open market but also by group driven forces inclined towards the common interests of the entities of a group Determination of transfer price becomes imperative Transfer price to be determined on arms length basis Transfer pricing therefore refers to the setting of prices (arms length price) for transactions between associated enterprises the transfer of property or services
- 4. WHY TRANSFER PRICING Helpful in correct pricing of Product/Services for tax calculation Helpful in Performance Evaluation Helpful in complying Statutory Legislations
- 5. ILLUSTRATION ABC H Co ABC S Co XYZ Country A Country B Purchase of computer from S Co “Controlled Transaction” Purchase of computer from third party “Uncontrolled Transaction”
- 6. ILLUSTRATION-2 PQR H Co PQR S Co Customer s PQR S Co is the distributor of PQR H Co’s watches in Country B Manufacturing Cost to Hco. $1400 Distribution Cost to SCo. $100 Transfer price $1500 Sale price in Country B $1600 H Co Profit $100 S Co Profit NIL (Cost =Revenue) Tax authorities of Country B insists that S Co should atleast report a profit of $100; thus transfer price to be reduced to $1,400 – Leads to economic double taxation. Country A Country B
- 7. BASIC ISSUES UNDERLYING IN TP The key issues in jurisdiction: Which country should tax the income of the group entities engaged in the transaction? What happens if both countries claim the right to tax the same income? If the tax base arises in more than one country, should one of the country’s give tax relief to prevent double taxation of the relevant entities’ income, and if so, which one? What needs to be done to minimise profit shifting from one country to another?
- 8. BASIC ISSUES UNDERLYING IN TP The key issues in valuation: Valuation of intra-group transfers that are prone to manipulations With the MNC being an integrated structure with the ability to exploit international differentials and to utilise economies of integration not available to a stand- alone entity, transfer prices within the group are unlikely to be the same prices that unrelated parties would negotiate
- 9. ARM’S LENGTH PRINCIPLE” (ALP) In general arm’s length price means fair price of goods transferred or services rendered To arrange an equitable agreement that will stand up to legal scrutiny, even Though the parties involved may have shared interests. Not specifically used in Article 9 of both OECD MTC and UN MTC. However it is well accepted by countries as encapsulating the approach taken in Article 9 with some differing interpretations.
- 10. Transfer pricing rules are essential for countries (for Tax administration and Tax Payers) in order to - Protect their tax base; - Eliminate double taxation ; and - Enhance cross border trade
- 11. A STATISTICS Countries where Transfer Pricing Regulations are in existence Argentina Australia Austria Belgium Brazil Canada Chile China Colombia Croatia Czech Republic Denmark Dominican Republic Ecuador Egypt Estonia Finland France Germany Hong Kong Hungary India Indonesia Ireland Israel Italy Japan Kenya Korea, North Korea, South Latvia Lithuania Luxembourg Malaysia Mexico Namibia Netherlands New Zealand Norway Oman Panama Peru Philippines Poland Portugal Romania Russia Singapore Slovakia Slovenia South Africa Spain Sweden Switzerland Taiwan Thailand Turkey United Kingdom United States Uruguay Venezuela Vietnam Countries where Transfer Pricing Regulations is still emerging Algeria Angola Armenia Aruba Bangladesh Belarus Bolivia Botswana Bulgaria Burkina Faso Cambodia Cote d'Ivoire Cyprus El Salvador Ethiopia Gambia Georgia Ghana Greenland Iceland Kazakhstan Kuwait Liberia Libya Macedonia Malawi Mali Mauritania Mauritius Mongolia Morocco Mozambique Netherlands Antilles Nicargua Nigeria Pakistan Papua New Guniea Qatar Senegal Sierra Leone Sri lanka Trinidad and Tobago Ukraine Uzbekistan Zambia Zimbabwe
- 12. HISTORY-TRANSFER PRICING New indian economic policy 1991- double taxation Commencements of MNCs The Finance Act, 2001 introduced law of transfer pricing in India through Sections 92 to 92F of the Income Tax Act, 1961
Editor's Notes
- #5: 1. Helpful in correct pricing of Product/Services - An effective transfer pricing mechanism helps an organization in correctly pricing its product and services. Since in any organization, transaction between associated parties occurs frequently, it is necessary to value all transaction correctly so that the final product/ services may be priced correctly. 2. Helpful in Performance Evaluation : For the performance evaluation of any entity, it is necessary that all economic transactions are accounted. Calculation of correct transfer price is necessary for accounting of inter related transaction between two Associated enterprises. 3. Helpful in complying Statutory Legislations : Since related party transaction have a direct bearing on the profitability or cost of a company, the effective transfer pricing mechanism is very necessary. For example, if the related party transactions are measured at less value, one unit may incur loss and other unit may earn undue profit. This will result in income tax imbalances at both parties end. Similarly, wrong transfer pricing may lead to wrong payment of excise duty, custom duty /sales tax (if applicable) as well.