Transfer Pricing

Ajay Kumar Shakya

Transfer Price: What and Why?

TP means the value or price at which transactions take place amongst related parties. TP are the prices at which an enterprise transfers physical goods and intangible property and provides services to associated enterprises TP gain significance because these can be used by the controlling party to their advantage to minimize tax incidence.

Transfer Price: What and Why?

Approximately 60% of the total transactions across the world are between related parties. If the transactions are across different tax jurisdictions, where tax rates are different, shifting is beneficial.

Transactions

Internal
(Within the country)

External
(outside the country)

Inter Company

Intra Company

Inter Comapny

Intra Company

Revenue Profit Capital Gain Royalty

Control System Non-Related: Related cost centres Profit/Dividend/Royalty Profit/Dividend/Royalty revenue centres Forex Fluctuations Transfer Pricing profit/Investment centre Accounting Forex/Accounting

Control Systems Forex Fluctuations Accounting Transfer Pricing

Factors Affecting Transfer Pricing

Internal factors: Performance Measurement and Evaluation External Factors: Accounting Standard Income Tax Custom Duty Currency Fluctuations Risk of Expropriation

Transfer Price Regulations

International OECD formulated Guidelines on transfer pricing. They serve as generally accepted practices by the tax authorities India The Finance Act 2001 introduced the detailed TPR w.e.f. 1st April 2001 The Income Tax Act AS-18 Other Relevant Acts

Accounting Standard 18
Requires disclosure of any elements of the related party transactions necessary for an understanding of the financial statements.

Related Parties
Control by ownership 50% of the voting right Control over composition of board of directors Power to appoint or remove the directors Control of substantial interest 20% or more interest in the voting power