Transfer Pricing

Karan Wadhawan 19A

Rohit Verma 39A
Tapan Sharma 50A
 What companies do.
Route 1- 100  A  200  B  400 (Profit to A=Rs. 100)
Route 2- 100  A  400 (Profit B= Rs. 300)
The transaction between A and B is arranged and not governed by market forces. The
profit of 200 rupees is, thereby, shifted to the country of B.
The goods is transferred on a price (transfer price) which is arbitrary or dictated (200
hundred rupees), but not on the market price (400 rupees).
 What is transfer pricing?
• Transfer Pricing refers to the value attached to the sale/purchase of goods or
services between related parties
• It can also be defined in a way as the price paid for the goods transferred from two
economic units situated in two different countries but bear the same control or
subsidiary of the same parent company
• The issue of transfer pricing arises when two or more business entities situated in
two different jurisdictional areas which are related to each other in a way and they
transfer some goods at a price which is affordably low.
• The companies dealing are International in nature but related to each other via
common control and referred as Related Parties.
 Why do we need Transfer pricing?
• Tax saving
• Through Transfer Pricing Rules, the companies can maintain their business
structure in a flexible manner.
 Without Transfer
pricing

With Transfer
pricing
 Arm’s Length Principle.
• The arm's length principle (ALP) is the condition or the fact that the parties to a
transaction are independent and on an equal footing. Such a transaction is known as
an "arm's-length transaction".
• Arm’s length price is the price at which independent parties charge under uncontrolled
conditions.
 Methods

• Traditional transaction methods:

• CUP method
• Resale price method
• Cost plus method
• Transactional profit methods:
• Transactional net margin
method (TNMM)
• Transactional profit split
method.
 Transactions subject to Transfer pricing rules

1. Sale of finished goods; 8. Support services;

2. Purchase of raw material;
3. Purchase of fixed assets;
4. Sale or purchase of machinery etc.
5. Sale or purchase of Intangibles.
6. Reimbursement of expenses paid/received;
7. IT Enabled services;
9. Software Development services;
10. Technical Service fees;
11. Management fees;
12. Royalty fee;
13. Corporate Guarantee fees;
14. Loan received or paid.
Importance to Regulate Transfer Pricing
• TP is used for evading the taxes or manipulating the prices of the goods. Such
malpractices that are abusive in nature and can lead to later consequences.
• Companies manipulate the prices entirely. Interestingly; 60% of the global market is
engaged in related party transactions so as to shift the profit to low taxed jurisdiction.
Such kind of practices necessitates the regulation of Transfer Pricing.
 Conclusion
• Transfer pricing refers to the terms and conditions which associated enterprises agree for
their controlled transactions. These prices are important. They affect the individual results
of associated enterprises and therefore the amount of taxes they pay.
• Transfer pricing rules provide that the terms and conditions of controlled transactions may
not differ from those which would be made for uncontrolled transactions. The main goal of
these rules is to prevent profit shifting from high-tax countries to low-tax countries (and the
other way around, although less likely).
• Authorities of many countries focus on compliance with TP rules. Not paying sufficient
attention can result in big financial exposures. The rules impose a number of obligations to
firms doing international business.