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Transfer Pricing_Niraj Agarwal

Transfer Pricing_Niraj Agarwal

Ratings: (0)|Views: 193|Likes:
Published by Niraj Agarwal
Transfer Pricing
AS 18
Tax
Corporate Governance
Direct Tax Code
Inter Department Transfer
Transfer Pricing
AS 18
Tax
Corporate Governance
Direct Tax Code
Inter Department Transfer

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Published by: Niraj Agarwal on Aug 30, 2009
Copyright:Attribution Non-commercial

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05/11/2014

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Page 1
What is Transfer Pricing
 
 – 
Transferpricing as the name suggests, is the transferof goods and services within theorganization. The key implication in theprocess is that the prices are set within theorganization and hence a chance of manipulation is always there. Theloopholes in the whole system can beexploited by MNCs as well as the domesticcompanies to book higher or lower profitsdepending on the situation and hence strictrules and regulations are needed to curb themanipulations. Transfer Pricing Manipulation (TPM) as it is normally called is not onlyrelevant in cross border transactions where revenues of one country gets transferred toanother (where tax rates are more favorable) but is also relevant within country , wherecompanies try to take advantages of different level of sales tax and VAT by using the processof TPM. But luckily or unluckily Transfer Pricing provisions are applicable only when
 – 
 1.
 
Their is an international transaction(s) [defined in Sec 92B] „between‟
2.
 
Two or more Associated enterprises [defined in Sec 92A].
Current Regulatory Regime in India & Globally:
(a) Indian and global tax authorities have armed themselves with substantial powers to plugthe tax evasion that arises from creative transfer pricing.(b) Transactions between related parties come under the ambit of Accounting Standard AS18 in India and IAS 24 internationally. These standards require disclosure of certain aspectsof such transactions.(c) Neither in India nor elsewhere in the world have company law authorities prescribedtransfer pricing methods or disclosures.
(d) The methodologies for determining arm‟s length transfer prices (Comparable
Uncontrolled Price, Resale Price Method etc.) are broadly the same in India and abroad.
 
http://nirajagarwal.blogspot.com/
Page 2
(e) There is a great deal of diversity in the definition of related party.
Implications:
Tax Arbitrage- If there are no strict rules and regulations, an MNC would like tooperate in such a manner that most of its profits are booked in those subsidiarieswhich are located in tax heavens. Hence they would adopt such transfer pricingmechanisms that goods in subsidiaries are bought at the lowest minimum prices andhence a supernormal profit resulting in lower taxes compared to other places. In orderto curb this practices, tax authorities are very strict worldwide in related partytransactions. Recently Glaxosmithkline in 2006 had to part away with US dollar 3.1billion as penalty for adopting improper transfer pricing mechanisms.
Effects of TPM on countries:
Loss of tax revenue & Custom duty.Unfavorable BOP statements.Flow of FDI is more where there are easier norms for Transfer pricing.Methods of price calculation: The Finance Act 2001 introduced detailed mechanism to dealwith TPM. The idea was to determine whether the transactions are carried on at
arm
s lengthprice
.Arm
s Length Price is the price charged during uncontrollable transactions. Two mostcommon methods are
 – 
 1.
 
Checking the price in a similar transaction between two unrelated parties,A B Vs C D2.
 
Checking the price in a similar transaction where one party is related,A B Vs A CThe various methods to find the arm
s length price are -Comparable uncontrolled price method- In order to judge the fairness of the pricecharged, the prices of two independent companies are compared with the companyand its subsidiary in question.
 
http://nirajagarwal.blogspot.com/
Page 3
Cost plus method- This approach requires the companies to add a mark up on theircost. The mark up must be comparable to the firm in the same sector. This methodalso require the firm to stick to the below mentioned methods for their cost accounting
o
 
Actual cost approach
o
 
Standard cost approach
o
 
Variable cost approach
o
 
Marginal cost approachThe issue of fixed cost and cost of R&D though remains unanswered in this approach.Resale Price method- It is the same as the cost plus method , the only difference beinghere the mark up is subtracted from the final selling price to arrive at the fair price. Themark up is obtained from the similar firm in same industry. Though the process isdifficult to implement in case of intangible goods as the cost of technological know-how,R&D is difficult to ascertain correctly.Non Transactional Methods: In non transactional methods, related parties income figuresare considered and adjusted according to their share. These are:
o
 
Profit Split Method (PSM): PSM is used when AEs transactions are so integratedthat it becomes impossible to conduct a TP analysis on a transactional basis. First,the combined net profit incurring to related enterprises from a transaction isdetermined. Then, the combined net profit is allocated between related enterpriseswith reference to market returns achieved by independent entities in similartransactions. The relative contribution of related parties is then evaluated on thebasis of assets employed, functions performed or to be performed and risk assumed.
o
 
Transactional Net Margin Method (TNMM): TNMM is normally adopted in casesof transfer of semi-finished goods, distribution of finished products (where resaleprice method (RPM) cannot be adequately applied) and transactions involving theprovision of services. TNMM compares the net profit margin relative to anappropriate base (sales, assets or costs incurred) of the tested party with net profitmargin of the independent enterprises in similar transactions after makingadjustments regarding functional differences and risk involved.Under the Indian TP regime, there is no hierarchy in terms of preferred methods of determining ALP. Indeed, as per section 92C (2) of the Income Tax 1961, the most

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