Transfer Pricing
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TRANSFER PRICING
By
Group: 9
Contents
Definition of Transfer Pricing
Why Problem?
Operational Difficulties Determination of Arm’s Length Price (ALP) Databases Benchmarking
Legal Issues
Accounting Issues
Problems in Documentation 2
Contd….
Tax Assessments
Issues relating to Allied Laws
Treatment of TP in India
Pricing Methods
Way Forward 3
Transfer pricing
Transfer pricing is not an exact science
4
Definition of Transfer Pricing
Transfer pricing is the price charged by one associate of a corporation to another associate of the same corporation.
When one subsidiary of a corporation in one country sells goods, services or know-how to another subsidiary in another country, the price charged for these goods or services is called the transfer price.
Transfer pricing provisions primarily require any income arising from an international transaction between two or more Associated Enterprises (‘AE’) to be at arm’s length price and comparable to similar transactions between unrelated enterprises. 5
Why Problem?
Transfer pricing is a strategy frequently used by TNCs to book huge profits through illegal means.
Lowering prices in countries where tax rates are high and raising them in countries with a lower tax rate
Removal of restrictions on capital flows
Increased mergers and acquisitions
6
Operational Difficulties
Determination of ALP
Some intra-group transactions are so unique that they can-not be compared
TP reports of two AE’s would have conflicting conclusions
No recommended Profit Level Indicator (PLI) – wide fluctuations may result depending upon each PLI.
Corporate hesitant to disclose information
Major countries do not require rejection of other methods 7
Operational Difficulties
Databases
Time gap in search of Databases
Non availability of recognized databases
Lack of comparables
8
Operational Difficulties
Benchmarking
No recommended method for benchmarking
Transaction by Transaction Aggregate of similar Transactions Based on Functions For each AE separately
Pricing of Intangibles – soft targets Difficulty in justifying adjustments for factors having a bearing on prices Insufficient information available for calculating gross margins 9
Operational Difficulties
Benchmarking
In case of rapidly fluctuating prices, which prices to compare with
Gift from one enterprise to another
Transfers at cost
Capital transaction
Cost Allocation & Cost Sharing Arrangements
Acceptable Band of (+ - 5%) 10
Legal Issues
Rule 10D(2) – No documents required for transactions below 1 Crore, but still to justify Arm’s Length basis
Determination of AE’s – unusual/ irrelevant situations
Whether AO can open previous years’ assessments on the basis of TP report
Whether transactions which do not affect profitability are covered– e.g. reimbursements
Whether Liaison Offices are covered
11
Accounting Issues
Segmental accounts were not mandatory in India till 2001
How to factor Internal Set-offs
Comparability in special circumstances – startup losses, market strategy, government controls, winding-up.
12
Problems in Documentation
Duplication of Documents in case a Foreign Company (FC) earns Royalty, technical fee, interest on ECB etc – ie FC also required to file a ROI, TP report
How to document discussions over phone and in meetings
13
Tax assessments
Not an exact science
Concept of TP is still in its infancy.
Flexibility to apply a method other than that prescribed or apply a combination of methods
Use of secret comparables
Confidentiality of information
Authenticity & reliability of databases
14
Role of Tax Officer
Brief given to the TPO by the tax authorities Objective in mind Degree/depth of the review
Overall understanding (general feel) Transactional analysis Actual documentation review
Assessment Procedure What level of information/document would be considered acceptable. 15
Issues relating to Allied Laws
Whether Customs authorities can take recourse of valuation in TP report
FERA/FEMA issues on higher valuation in TP report
16
Treatment of TP in India
Applicability There must be an international transaction, Such international transaction must be between two or more associated enterprises, either or both of whom are non-resident/s.
Pricing Method Allowed CUP method, Resale Price Method, CPM, Profit Split Method, TNMM, or Any other method prescribed by the CBDT 17
Pricing Methods
CUP method The taxpayer or another member of the group sells the particular product, in similar quantities and under similar terms to arm's length parties in similar markets (an internal comparable)
Resale Price Method The resale price method begins with the resale price to arm's length parties (of a product purchased from an non-arm's length enterprise), reduced by a comparable gross margin 18
CPM (Cost plus method) The cost plus method begins with the costs incurred by a supplier of a product or service provided to an non-arm's length enterprise, and a comparable gross mark-up is then added to those costs
Profit Split Method The first step is to determine the total profit earned by the parties from a controlled transaction. The second step is to split the profit between the parties based on the relative value of their contributions 19
TNMM (Transactional net margin method) Compares the net profit margin of a taxpayer arising from a non-arm's length transaction with the net profit margins realized by arm's length parties from similar transactions
20
Documentation/ Return
Enterprise-wise documents
Transaction-specific documents
Description of the enterprise, Relationship with other associated enterprises, Nature of business carried out. Information regarding each transaction, Description of the functions performed, Assets employed and risks assumed by each party to the transaction, Economic & Market Analysis etc.
Computation related documents
Describe in details the method considered, Actual working assumptions, policies etc., Adjustment made to transfer price, Any other relevant information, data, documents relied for determination of arm's length price etc. 21
Penalty
Penalty for concealment of income or furnishing inaccurate particulars thereof- 100% to 300% of the tax sought to be evaded.
Penalty for failure to keep and maintain information and documents in respect of International transaction- 2% of the value of each international transaction
Penalty for failure to furnish report under Section 92E- Rs. 100000/22
Way Forward
Transfer pricing "band" rather than a transfer pricing "price"
“Safe harbor" rules
Procedures for obtaining Agreements (APA)”
Use of multiple year data
Objective and reasonable approach of the tax officer 23
"Advance
Pricing
Thank You……………
24
By
Group: 9
Contents
Definition of Transfer Pricing
Why Problem?
Operational Difficulties Determination of Arm’s Length Price (ALP) Databases Benchmarking
Legal Issues
Accounting Issues
Problems in Documentation 2
Contd….
Tax Assessments
Issues relating to Allied Laws
Treatment of TP in India
Pricing Methods
Way Forward 3
Transfer pricing
Transfer pricing is not an exact science
4
Definition of Transfer Pricing
Transfer pricing is the price charged by one associate of a corporation to another associate of the same corporation.
When one subsidiary of a corporation in one country sells goods, services or know-how to another subsidiary in another country, the price charged for these goods or services is called the transfer price.
Transfer pricing provisions primarily require any income arising from an international transaction between two or more Associated Enterprises (‘AE’) to be at arm’s length price and comparable to similar transactions between unrelated enterprises. 5
Why Problem?
Transfer pricing is a strategy frequently used by TNCs to book huge profits through illegal means.
Lowering prices in countries where tax rates are high and raising them in countries with a lower tax rate
Removal of restrictions on capital flows
Increased mergers and acquisitions
6
Operational Difficulties
Determination of ALP
Some intra-group transactions are so unique that they can-not be compared
TP reports of two AE’s would have conflicting conclusions
No recommended Profit Level Indicator (PLI) – wide fluctuations may result depending upon each PLI.
Corporate hesitant to disclose information
Major countries do not require rejection of other methods 7
Operational Difficulties
Databases
Time gap in search of Databases
Non availability of recognized databases
Lack of comparables
8
Operational Difficulties
Benchmarking
No recommended method for benchmarking
Transaction by Transaction Aggregate of similar Transactions Based on Functions For each AE separately
Pricing of Intangibles – soft targets Difficulty in justifying adjustments for factors having a bearing on prices Insufficient information available for calculating gross margins 9
Operational Difficulties
Benchmarking
In case of rapidly fluctuating prices, which prices to compare with
Gift from one enterprise to another
Transfers at cost
Capital transaction
Cost Allocation & Cost Sharing Arrangements
Acceptable Band of (+ - 5%) 10
Legal Issues
Rule 10D(2) – No documents required for transactions below 1 Crore, but still to justify Arm’s Length basis
Determination of AE’s – unusual/ irrelevant situations
Whether AO can open previous years’ assessments on the basis of TP report
Whether transactions which do not affect profitability are covered– e.g. reimbursements
Whether Liaison Offices are covered
11
Accounting Issues
Segmental accounts were not mandatory in India till 2001
How to factor Internal Set-offs
Comparability in special circumstances – startup losses, market strategy, government controls, winding-up.
12
Problems in Documentation
Duplication of Documents in case a Foreign Company (FC) earns Royalty, technical fee, interest on ECB etc – ie FC also required to file a ROI, TP report
How to document discussions over phone and in meetings
13
Tax assessments
Not an exact science
Concept of TP is still in its infancy.
Flexibility to apply a method other than that prescribed or apply a combination of methods
Use of secret comparables
Confidentiality of information
Authenticity & reliability of databases
14
Role of Tax Officer
Brief given to the TPO by the tax authorities Objective in mind Degree/depth of the review
Overall understanding (general feel) Transactional analysis Actual documentation review
Assessment Procedure What level of information/document would be considered acceptable. 15
Issues relating to Allied Laws
Whether Customs authorities can take recourse of valuation in TP report
FERA/FEMA issues on higher valuation in TP report
16
Treatment of TP in India
Applicability There must be an international transaction, Such international transaction must be between two or more associated enterprises, either or both of whom are non-resident/s.
Pricing Method Allowed CUP method, Resale Price Method, CPM, Profit Split Method, TNMM, or Any other method prescribed by the CBDT 17
Pricing Methods
CUP method The taxpayer or another member of the group sells the particular product, in similar quantities and under similar terms to arm's length parties in similar markets (an internal comparable)
Resale Price Method The resale price method begins with the resale price to arm's length parties (of a product purchased from an non-arm's length enterprise), reduced by a comparable gross margin 18
CPM (Cost plus method) The cost plus method begins with the costs incurred by a supplier of a product or service provided to an non-arm's length enterprise, and a comparable gross mark-up is then added to those costs
Profit Split Method The first step is to determine the total profit earned by the parties from a controlled transaction. The second step is to split the profit between the parties based on the relative value of their contributions 19
TNMM (Transactional net margin method) Compares the net profit margin of a taxpayer arising from a non-arm's length transaction with the net profit margins realized by arm's length parties from similar transactions
20
Documentation/ Return
Enterprise-wise documents
Transaction-specific documents
Description of the enterprise, Relationship with other associated enterprises, Nature of business carried out. Information regarding each transaction, Description of the functions performed, Assets employed and risks assumed by each party to the transaction, Economic & Market Analysis etc.
Computation related documents
Describe in details the method considered, Actual working assumptions, policies etc., Adjustment made to transfer price, Any other relevant information, data, documents relied for determination of arm's length price etc. 21
Penalty
Penalty for concealment of income or furnishing inaccurate particulars thereof- 100% to 300% of the tax sought to be evaded.
Penalty for failure to keep and maintain information and documents in respect of International transaction- 2% of the value of each international transaction
Penalty for failure to furnish report under Section 92E- Rs. 100000/22
Way Forward
Transfer pricing "band" rather than a transfer pricing "price"
“Safe harbor" rules
Procedures for obtaining Agreements (APA)”
Use of multiple year data
Objective and reasonable approach of the tax officer 23
"Advance
Pricing
Thank You……………
24
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