TRANSFER PRICING IN

TAXATION PURVIEW

JIMSHAD AHAMMED K

AJMAL HAKHIM V

M.COM (A&T)

TRANSFER PRICE

The price of goods/services which is used inaccounting for transfer of goods or services from oneresponsibility centre to another or from one companyto another associated company.

Eg: XYZ Co. is expert in providing electrical andelectronic services. It is engaged in providing supportto its associated company as well as it is engaged inoutsourcing contract. If XYZ Co. provides someservices to its associated company, the transactionshould be accounted at price calculated using transferprice mechanism.

WHY TRANSFER PRICING

Rise of intra group trade – including highly complexinternational transactions involving intangibles andmulti-tiered services

MNC transaction structure determined not only byopen market but also by group driven forces inclinedtowards the common interests of the entities of agroup

Determination of transfer price becomes imperative

Transfer price to be determined on arms length basis

Transfer pricing therefore refers to the setting ofprices (arms length price) for transactions betweenassociated enterprises the transfer of property orservices

WHY TRANSFER PRICING

Helpful in correct pricing ofProduct/Services for tax calculation

Helpful in Performance Evaluation

Helpful in complying StatutoryLegislations

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”

ILLUSTRATION-2

PQR

H Co

PQR

S Co

Customer

s

PQR S Co is the distributor of PQR HCo’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 SCo 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

BASIC ISSUES UNDERLYING IN TP

The key issues in jurisdiction:

Which country should tax the income of the groupentities engaged in the transaction?

What happens if both countries claim the right totax the same income?

If the tax base arises in more than one country,should one of the country’s give tax relief to preventdouble taxation of the relevant entities’ income, andif so, which one?

What needs to be done to minimise profit shiftingfrom one country to another?

BASIC ISSUES UNDERLYING IN TP

The key issues in valuation:

Valuation of intra-group transfers that areprone to manipulations

With the MNC being an integrated structurewith the ability to exploit internationaldifferentials and to utilise economies ofintegration not available to a stand- aloneentity, transfer prices within the group areunlikely to be the same prices that unrelatedparties would negotiate

ARM’S LENGTH PRINCIPLE” (ALP)

In general arm’s length price means fair price ofgoods transferred or services rendered

To arrange an equitable agreement that willstand up to legal scrutiny, even

Though the parties involved may have sharedinterests.

Not specifically used in Article 9 of both OECDMTC and UN MTC. However it is well acceptedby countries as encapsulating the approachtaken in Article 9 with some differinginterpretations.

Transfer pricing rules are essential for countries (forTax administration and Tax Payers) in order to

- Protect their tax base;

- Eliminate double taxation ; and

- Enhance cross border trade

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

A STATISTICS

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