What is transfer pricing?
Transfer pricing is the price set for transactions between related entities within multinational enterprises (MNEs). MNEs manipulate these prices to shift profits to low-tax countries, reducing their overall tax burden. This practice, differing from arm’s length pricing between independent entities, often leads to tax avoidance and revenue loss for high-tax countries, making it a key concern for tax authorities.
Why is transfer pricing important for businesses?
Transfer pricing is crucial as it:
- Ensures compliance with tax laws and avoids penalties.
- Helps businesses allocate profits fairly across jurisdictions.
- Minimizes the risk of tax disputes and audits.
- Supports efficient global business operations and financial planning.
How does transfer pricing affect tax liabilities?
Companies mainly opt for transfer pricing to minimize the overall tax burden of the parent company. Companies charge a higher price for divisions in high-tax countries while charging a lower price for divisions in low-tax countries. This helps them in maximising their business profitability.
What are the key methods to compute transfer pricing?
The key principles include:
- Comparable Uncontrolled Price (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Profit Split Method (PSM)
What documentation is required for transfer pricing?
For transfer pricing compliance, businesses must maintain detailed documentation as per Rule 10D of Income Tax Rules. This includes:
- Ownership details: Structure, voting power, and shareholding.
- Business profiles: Description of the MNC group and associated enterprises.
- Transaction details: Nature, terms, pricing, and comparability analysis.
- Financial data: Budgets, forecasts, and economic analysis.
- Pricing methods: Arm’s length price determination and assumptions.
- Adjustments & compliance: Transfer price adjustments and tax implications.
This ensures transparency in international and specified domestic transactions.
How does BC Shetty & Co. assist with transfer pricing issues?
At BC Shetty & Co., we provide professional guidance on:
- Transfer pricing documentation and compliance.
- Defending against tax audits and assessments.
- Developing pricing strategies that align with regulations.
- Advising on tax-efficient business structuring.
Our team ensures you meet regulatory requirements while minimizing tax risks.
How can transfer pricing be adjusted to meet regulatory requirements?
If the Income Tax Department, through the Transfer Pricing Officer (TPO), believes that the transfer pricing charged by an Indian entity to its overseas associated enterprise is not at arm’s length, the officer has the authority to determine the appropriate transfer price using approved methods. Based on this assessment, the TPO can make adjustments to the pricing, which may result in an additional tax liability for the assessee. This process is known as a transfer pricing adjustment and can have financial implications for the taxpayer.