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Transfer Pricing : A Global & India

What is transfer Pricing ?


Transfer Pricing is a term used to describe all aspects of intercompany pricing arrangements between related business entities, & and commonly applies to intercompany transfers of tangible property, intangible property, services & finance transactions. Intercompany transactions across borders are growing rapidly .
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Objectives of TP
It should provide each business unit with the relevant

information.
It needs to determine optimum trade off between companies cost

and revenue.

Click to edit Master subtitle style

It should induce the goal similarity decision to improve units

profit.
It should help to measure the economic performance of
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business unit.

METHODS
Market Based

Cost Based
Negotiate d

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Global Trends

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Transfer Pricing: The Most Important Tax Issue

Overall

TP continues to be, and will remain, the most important tax issue facing Multinational Enterprises (MNEs)

More and more countries have introduced comprehensive documentation and penalty regulations Increasingly aggressive audit environment

Increasing questioning and data gathering for in-depth scrutiny Recruiting and training of specialist resources to examine more complex transactions level of cross country co-operation among tax 66

Increasing 4/3/12

Global Trends: Changing Approaches

Changing Environment

New wave of entrants to enforcement of transfer pricing Old guard making significant changes to approaches

Trends
In principle acceptance of arms length principle on a consistent basis with Organization for Economic Co-operation 4/3/12 77 and Development (OECD) norms and

Transfer Pricing in India

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Legislative Overview
Legislation introduced with effect from April 1, 2001 Built on OECD Guidelines, but with significant deviations Provisions applicable only if: Their is an international transaction(s) [defined in Sec 92B] between Two or more Associated enterprises.[defined in Sec 92A]. Exceptions Provisions do not apply in certain cases [Section 92(3)] Deeming provisions [Section 92B(2)] Transaction between an enterprise and a person (other than an associated

enterprise) shall be deemed to be a transaction between two associated enterprises, if there exists a prior agreement or the terms of such a international transaction are in substance determined between one of these entities and the associated enterprise of the other contracting entity.

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Steps Involve in Transfer Pricing Policy

Transfer Pricing benchmark analysis. Documentation Intercompany Agreement Implementation of transfer pricing policy Monitoring transfer pricing policyperforming updates to ensure that functions, risks & resources of tested party

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TP Audits - Key experiences


Loss making/ low margin companies (e.g. White goods manufacturer / distributor) Cost plus service companies with low mark-up Indian Companies of Big Global brands Marketing Expenditure Support from Associated Enterprise Use of un-reliable internal / external data for CUP analysis (like SVB Custom valuations) Companies paying Technical know-how/ Royalty/ Management fee (Benefits test)

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Managing Challenges & Future Outlook

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Criteria for selecting taxpayers for audit

Expected Changes / Guidance

Application of a more scientific screening process instead of a monetary threshold Use of IQ range, median.

Statistical methods

More detailed guidance on specific TP issues

Aggregation of transactions, Services, Intangibles transactions


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Guidance on collateral consequences of

Managing TP Risks

Need for comprehensive documentation for all inter-company transactions

Increased pressure for comparability analysis based on local comparables

Exceptions to global transfer pricing policy / common structures may be


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required

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Key Points
1.

TP audit proceedings
-

Perform risk Assessment Involve professional advisor at early stage Provide best defense strategy Maintain high and visible standards of good faith Consider alternative dispute resolution process

1.

2.

3.

2.

TP disputes
-

Maintain proper documentation Annual economic analysis update Evaluate whether markup needs to be enhanced based on impact assessment and current trends

Managing TP risks
1.

Assess the impact of the change in mark-up/ true-up adjustment on


-

1.

Consider the manner in which the change should be reflected:


-

Global TP policy Tax holiday and Profit accumulation in India

Change in inter-company Agreement Limited to a true-up adjustment in the financial statements Adjustment only in tax returns

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The Most Important Tax Issues


Transfer Pricing Tax Planning Double Taxation Value Added Taxes Tax Controversy Customs Duties Foreign Tax Credits 0% 10% 20% 30% 40%
39% 32% 9% 8% 6% 3% 3%

43% of European and 49% of Asian-Pacific respondents identified transfer pricing as the most important tax issue facing their organization
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Major World Economies with Effective Documentation Rules


1994-1997
USA Australia France Mexico Brazil New Zealand

1998-2001
USA Australia France Mexico Brazil New Zealand

2002-2003
USA Australia France Mexico Brazil New Zealand

2004-2005
USA Australia France Mexico Brazil New Zealand

Documentation Rules Expected Soon


Chile China Finland Ireland Israel Russia

6 Countries

Canada

Canada

Canada

Sweden

South Korea

South Korea

South Korea

7 Countries

Argentina

Argentina

Argentina

United Kingdom

United Kingdom

United Kingdom

Denmark

Denmark

Denmark

Venezuela

Venezuela

Venezuela

South Africa

South Africa

South Africa

Germany

Germany

Germany

20 Countries
Belgium Belgium Belgium

Japan

Japan

Japan

25 Countries
Poland Poland Poland

31 Countries

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Kazakhstan

Kazakhstan

Kazakhstan

India

India

India

Documentation Rule 10D


Entity related Price related Transaction related

Profile of industry Profile of group Profile of Indian entity Profile of associated enterprises

Transaction terms

Functional analysis (functions, assets and risks) Economic analysis (method selection, comparable benchmarking) Forecasts, budgets, estimates

Agreements Invoices Pricing related correspondence (letters, emails etc)

Contemporaneous documentation requirement Documentation to be retained for 9 years from financial year Documentation is not required to be maintained if the aggregate value of all international transactions does not exceed one crore rupees

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THANK YOU

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