(e) There is a great deal of diversity in the definition of related party.
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
s Length Price is the price charged during uncontrollable transactions. Two mostcommon methods are
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.