What is the Transfer Price Accounting

When a product is sold from one subsidiary to another within a company, it is known as transfer pricing. It influences the purchasing behavior of the subsidiaries and may have an impact on the income tax for the company as a whole

 Transfer prices are usually used when individual entities of a huge multi-entity firm are measured and treated as separately run entities. Another name for transfer price is transferred cost.

Methods of Transfer Pricing

Here are a number of ways which can help you to derive a transfer price:

·         Market rate transfer price- The market price is the simplest and most elegant transfer price. This helps the upstream subsidiary to sell either internally or externally and can earn similar profits. It can also help you earn the highest possible profit, unlike mandated pricing schemes, which are subject to the odd profit vagaries.

·         Adjusted market rate transfer price- If you are unable to get right the market pricing technique then use the general concept, by making some adjustments to the price. For example, you can reduce the market price for the absence of bad debts, since corporate management is likely to intervene and make you pay by force if there is a risk of non-payment.

·         Negotiated transfer pricing-You have to negotiate a transfer price between subsidiaries, without considering any market price as a baseline. The main reason why this kind of situation arises when there is no discernible market price because of two reasons, one the market is very small and the second the goods are highly customized.  The relative negotiating skills of the parties impact the prices.

·         The contribution of margin transfer pricing. If you want to derive a transfer price and there is no market price at all, then substitute it by creating a price based on a component’s contribution margin.

·         Cost-based transfer pricing. Ensure that each subsidiary transfers its products to other subsidiaries, on top of which successive subsidiaries add their costs to the product. Overall it means the final subsidiary that sells the completed goods to a third party will acknowledge the entire profit linked to the product.

·         Cost-plus transfer pricing- If you do not find any market price at all on which you can base a transfer price, you could consider using a system that can create a transfer price depending on the cost of the components, which is being transferred. You can do this by adding a margin onto the cost, where you compose the standard cost of a component, add a standard profit margin, and utilise the result as the transfer price.

More and number of countries have started embracing Transfer Pricing (“TP”) and regulations which includes mandatory documentation, Transfer Pricing has indeed become very complex. In India, with the ongoing enforcement of Transfer pricing regulations in the country and continuous adjustments being made, which focusses on both new and more complicated issues focusses on a reality that TP controversies are the expensive and quite time-consuming thing to deal with and it results in double taxation of income and may lead to uncertainty.

Top 10 Tips for Managing Sales Tax Audits

The sales and tax tips help your business to develop an effective proactive sales tax strategy which helps you to get audit-ready. Businesspersons find it tough to understand how to implement the safeguards and systems, monitor the changing statutory rules, and find the right methods to collect the right sales and use the tax catering to the right jurisdiction at the right time, all this can be difficult to maintain for even the most compliance-minded businessperson. So, we have concocted the following tips to address sales and tax compliance issues.

The Top 10 Sales Tips by the Renowned Auditors in Chennai

These handy sales tips will help you sail through the Tax audits with ease.

•    Stop underestimating sales tax complexity
 As a business grows its sales tax obligations becomes more and more difficult to manage. If you underestimate the complexity of sales tax, you will unwittingly increase your risk of audit.  But in order to keep pace with the vast array of tax requirements, you have to put in intelligence, determination and the right tools.

•    Figure out tax liability by unravelling changing nexus rules
The link between a business and a taxing jurisdiction requires a sales tax collection and remittance, most businesses are unaware of the dramatic changes to the current nexus laws. To change things, review your current nexus and focus on the applicable rule changes.

•    Find out more about products and services which are taxable
 Update sales tax rates for any new products and services to bring about any related jurisdictional changes. Focus on utilities, business services, personal services, professional services and so on. Keep reviewing the taxability matrix to keep yourself updated.

•    Keep a tab on consumer use tax
Consumer use tax is mostly found as the unpaid tax in audits. Learn the main difference between sales and use tax and adopt a written use tax policy. Track and account for withdrawals from the resale inventory.

•    Focus on the changing exemption certificate rules
 Businesses that control a large number of exemption certificates find it difficult when audited to link specific certificates with specific transactions. To fix that you need to create an audit trail specifically for certificates. Quickly generate an exemption certificate summary report.

•    Find out when and where to remit sales and use the tax returns
Some companies who work extra hard to track and update changes, accurately in sales and use tax rules, but still boundaries and rate changes fail to remit their sales tax precisely.  To fix this find out whether your filing schedule has changed in applicable states and whether the states have implemented brand new e-filing or pre-payment needs.

•    Address the compliance hurdles
It is imperative that you avoid practices that may increase your risk of audit and also avoid typical filing errors. The filing errors include late payment or payment to the wrong jurisdictions. Remember to update product and service taxability according to the change in rules.

•    Know more about the applicable sales tax holiday
Get to know about products and services, which are exempt and up to what value within the purview of tax holiday rules.

•    Automate
Automation is really important right from inventory management to finance and sales, automation is what gives the companies flexibility, agility, and efficiency they need in a still-recovering market. To automate you need to identify the manual processes which show the lowest return on investments of time and money.

•    Seek help
Companies valiantly trying to collect, file, and report sales and use taxes find it really difficult to handle everything. To address this issue outsourcing and automating their payroll management can help!
To answer all your queries regarding sales tax, contact tax consultants in Chennai if you are based there and you will be able to manage sales tax without any hiccup.