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Transfer Pricing Regulations

C Transfers to X Cost to C SP of X Tax Rate for C Tax Rate for X

Impact of TP S-I S-2 S-3 S-4 S-5 200 280 300 400 500 100 100 100 100 100 300 300 300 300 300 20% 60%


C 200 100 100 20 80

S-1 X 300 200 100 60 40

Total 500 300 200 80 120

C 280 100 180 36 144

S-2 X 300 280 20 12 8

Total 580 380 200 48 152

C 300 100 200 40 160

S-3 X 300 300 0 0 0

Total 600 400 200 40 160


C 400 100 300 60 240

S-4 X 300 400 -100

Total 700 500 200 60 240

C 500 100 400 80 320

S-5 X 300 500 -200

Total 800 600 200 80 320


(Within the country)

(outside the country)

Inter Company

Intra Company

Inter Comapny

Intra Company

Revenue Profit Capital Gain Royalty

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

Related Profit/Dividend/Royalty

Transfer Pricing

Control Systems Forex Fluctuations Accounting Transfer Pricing

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 minimise 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.

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

AS-18 and Transactions

Purchase and sale of goods; Rendering or receiving services; Agency arrangements; Leasing arrangements; Transfer of research and development; Licence aggrements; Finance Guarantees and collaterals; Management contracts.

Income Tax Act and TP

Finance Act 2001 substituted the old section of 92 of the ITA by sections 92,92A to 92 F. These sections are the backbone of Indian TPR. These sections define the meaning of related parties, international transactions, pricing methodologies etc.

TPR: Some Important Concepts

Income/Expenses/Cost arising from an international transaction shall be computed having regard to arms length price

(ALP). ALP provisions can be applied if it leads to decrease in taxable income or increase in losses.

Associate Enterprise: 92A

Direct Control/Control through intermediary Holding 26% of voting power Advance of not less than 51% of the total assets of borrowing company. Guarantees not less than 10% on behalf of borrower Appointment of more than 50% of the BoD Dependence for 90% or more of the total raw material or other consumables

International Transactions: 92B

Transaction between two or more AE of which either both or anyone is a nonresident. Transactions:
Purchase/Sale/Lease Provision of service Lending or borrowing

Arms Length Price

Price which two independent firms would agree on. Price which is generally charged in a transaction between persons other than associated enterprises.

Arms Length Price: 92C

Comparable uncontrolled price method Resale price method Cost plus method Profit split method

Comparable uncontrolled price method

CUP method compares the price transferred in a controlled transaction to the price charged in a comparable un-controlled transaction. CUP method is the most direct and reliable way to apply the arms length principle.

Resale price method

The resale price method begins with the price at which a product is resold to an independent enterprise (IE)by an associate enterprise.
X sold to AE at Rs. 1000 (profit: 300) AE sold to an IE at Rs. 2000
(profit of Rs. 500 for relevant IE)

Arms length price = 2000 - 500 = 1500

Profit Split Method

PSM is used when transactions are interrelated and is not possible to evaluate separately. PSM first identifies the profit to be split for the AE. The profit so determined is split between the AE on the basis of the functions performed/assets/CE

Cost Plus Method

In CP method, first the cost incurred is determined. An appropriate cost plus markup is then added to the cost to arrive at an appropriate profit. The resultant figure is the arms length price.

Some Transactions subject to ALP

Purchase at little or no cost. Payment for services never rendered. Sales below MP/ Purchase above MP Interest free borrowings Exchanging property Selling of real estate at a price different from MP Use of trade names or patents at exorbitant rates even after their expiry.

Some Cases
Kinetic Honda Motors
Collaborator: Honda Motor Co. Ltd Japan and their Subsidiary Honda Trading Corpn. Japan

Hero Honda Motors Ltd.

Parent: Honda Motor Co. Ltd Japan and their Subsidiary Honda Trading Corpn. Japan

Some Cases
Peico Electronics & Electricals Ltd.
Parent: Phillips Netherlands and its subsidiaries

Asea Brown Boveri

Parent: ABB Switzerland and its subsidiaries

Videocon Group
Collaborators: Toshiba Co., Mitsubishi Co

ROS Computers 4% Software 10% Books 4% Overall 6.1% 2% 10% 5% 5.1%

Sales/Asset ROI 4 4 16% 8% 2 2 15% 20% 3 2 10% 10% 2.4 2.6 14.40% 13.51%