Transfer pricing is a setting of prices of goods and
services that are exchanged between the commonly controlled legal entities
within the paradigm of an enterprise. For example, if a subsidiary company
sells goods or provides specific services of a holding company, the price
charged for these services is known as transfer price and the setting is called
transfer pricing. Entities under the common control refer to those that fall
under the single parent corporation. Multinational corporations utilize
transfer pricing to allocate profits (the earnings before interest and taxes)
among the various subsidiaries all through the organization.
Transfer pricing offers tons of services for a company from
a taxation point of view, although regulatory authorities do not
think of using transfer pricing to avoid taxes. Transfer pricing takes
advantage of a number of tax regimes in different countries by booking a number
of profits for goods and services that are produced in a number of countries or
economies which has a lower tax rate. In some cases, companies also lower your
expenditure on interrelated transactions by avoiding the tariffs on goods and
services exchanged internationally. International tax laws are regulated by the
Organization for Economic Cooperation and Development (OECD) and the
auditing firms fall under OECD review and think of auditing the financial
statements of MNCs accordingly.
Example
Consider A Co., an Indian pen company manufacturing pens at
a cost of 10 rupees each in India. ABC
Co.’s subsidiary B sells the pens to
neighboring customers at 1 rs per pen and spends 10 Rs per pen on marketing and
distribution. The group’s total profit amounts to 80 Rs per pen. Now, Co. A
will charge a transfer price ranging from 20 Rs and 80 Rs per pen. Because of a
dearth of transfer price regulations, A Co. will evaluate where the tax rates
are lower and add more profit in that country. Thus, if Indian tax rates are
higher than the neighboring companies tax rates, the company will assign the
lowest possible transfer price to the sale of pens to company B.
The Transfer Pricing Laws in India was enacted in
India in 2001. It brought forward with the issue of Transfer Pricing to the forefront
amongst the numerous multinational corporations operating in India as well
as several Indian companies. Transfer Pricing is one of the key tax issues
for growth-oriented businesses that makes the international operations a
part of their operations wherein the senior management’s time and attention
are mandatory. Whatever may be the size, organizations they need an
effective and dependable Transfer Pricing policy, which when taken into
consideration the organization’s overall business strategy and operating
structure.
