Transfer pricing
kapil
(Querist) 23 June 2008
This query is : Resolved
Can anybody please tell me about transfer pricing, legal issues involved, and procedures carried out.
Please send me details on
kbhardwaj.19@gmail.com
Guest
(Expert) 23 June 2008
It is method of arriving at the price of a service or goods rendered/sold to a sister concern in another part of the world.
It is used in the Income tax Act 1961.
It is an extremely complicated issue and you can study about that in the Income Tax act.1961
Manish Singh
(Expert) 23 June 2008
TRANSFER PRICING Transfer pricing is simply the act of pricing of goods and services or intangibles when the same is given for use or consumption to a related party (e.g. Subsidiary) There can be either Market-based, i.e. equivalent to what is being charged in the outsidemarket for similar goods, or it can be non-market based. Importantly, two-thirds of the managers say their transfer pricing is non-market based.There can be internal and external reasons for transfer pricing. Internal include motivating managers and monitoring performance, e.g. by putting a cost to imported inputs. External would be taxes and tariffs. TRANSFER PRICING MANIPULATION This leads us to the point of Transfer Pricing Manipulation (TPM). It is TPM that is discouraged by Governments as against Transfer Pricing which is the act of pricing. However, in common parlance, it is Transfer Pricing which is generally used to mean TPM. TPM is fixing transfer price on non-market basis which generally results in saving the total quantum of organization’s tax by shifting accounting profits from high tax to low tax jurisdictions. The implication is moving of one nation’s tax revenue to another. A similar phenomenon exists in domestic markets where different states attract investment by under cutting Sales tax rates, leading to outflow from one state to another, something the Government is trying to curb by way of implementation of VAT. MOTIVATIONS FOR TPM It is not just the Corporate Tax differential that induces organizations to manipulations in Transfer Pricing. Some of the other reasons are: • High Customs Duty – leading to under-invoicing of goods. • Restriction on Profit Repatriation – leading to over-invoicing of raw materials, etctransferred from parent country, hence compensating for locked forex. • Ownership Restrictions ( E.g. Insurance Sector – 26%) – since this leads to less than justified returns on the technology or knowledge invested in the JV, MNEscircumvent it through over charging on royalties for technology, etc.
There can be various other similar motivations for TPM. The transactions most likely disputed by Governments are Administration & Management Fees, Royalties for intangibles and transfer of finished goods for resale. (Source: E & Y Survey) EFFCECTS OF TPM ON NATIONS 1. One primary and well appreciated effect is the loss of Government Tax and Custom Duty revenues. Loss of tax revenues in this form leads to a burden on the rest of the population through over taxation and/or borrowings by the Government, which becomes essential to meet expenditure requirements. 2. TPM also leads to distortions in Balance of Payments between the host and homecountry, something that has the potential to challenge the sovereignty of nationsgiven the mega size of some of these firms. 3. Another implication is on the location of international production and employment. Given the objective of maximization of global profits, MNEs will open subsidiaries where production is most profitable, which is where tax burden is less and therefore effect the level of FDI a country gets. This linkage is so strong that some like Hongkong and Singapore have no Transfer Pricing controls, making themselves attractive destinations for FDI. Transfer Pricing has been existing in domestic and importantly international transactionsover decades now and there is nothing novel about the concept. What is, however, is the extent of this practice which has now acquired critical mass to be given due consideration by various tax authorities. TPM GAINING IMPORTANCE The issue has gained importance in the recent past due to organizations acquiring hugeeconomic power (in some cases more than nations themselves - Of the 100 biggest economies, 51 are companies and 49 are countries) operating in scores of nations, making their sales, production and distribution structure more and more complex to come under the purview of one tax regime. The other phenomenon is increasing liberalization due to w
