transfer pricing(2)

7/24/2019 Transfer Pricing(2)

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Transfer PricingRegulations


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S-I S-2 S-3 S-4 S-5

C Transfers to X 200 280 300 400 500

Cost to C 100 100 100 100 100

SP of X 300 300 300 300 300

Tax Rate for C

Tax Rate for X

Impact of TP

20%

60%


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C X Total C X Total C X Total

SP 200 300 500 280 300 580 300 300 600

Cost 100 200 300 100 280 380 100 300 400

PT 100 100 200 180 20 200 200 0 200

Tax 20 60 80 36 12 48 40 0 40

P!T 80 40 120 144 8 152 160 0 160

S-3S-1 S-2

C X Total C X Total

SP 400 300 "00 500 300 800

Cost 100 400 500 100 500 600

PT 300 -100 200 400 -200 200

Tax 60 60 80 80

P!T 240 240 320 320

S-4 S-5


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R e # e n $ e P r o f % t

C a p % t a l & a % nR o ' a l t '

I n t e r C o m p a n '

C o n t r o l S ' s t e m

c o s t c e n t r e sr e # e n $ e c e n t r e s

p r o f % t ( I n # e s t m e n t c e n t r e

I n t r a C o m p a n '

I n t e r n a l) * % t + %n t + e c o $ n t r ' ,

o n - R e l a t e . /

P r o f % t ( 0 % # % . e n . ( R o ' a l t '1 o r e x 1 l $ c t $ a t % o n s

! c c o $ n t % n 2

R e l a t e .

P r o f % t ( 0 % # % . e n . ( R o ' a l t 'T r a n s f e r P r i c i n g

1 o r e x ( ! c c o $ n t % n 2

I n t e r C o m a p n '

C o n t r o l S ' s t e m s

1 o r e x 1 l $ c t $ a t % o n s! c c o $ n t % n 2

T r a n s f e r P r % c % n 2

I n t r a C o m p a n '

3 x t e r n a l) o $ t s % . e t + e c o $ n t r ' ,

T r a n s a c t % o n s


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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 transfersphysical 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 ta incidence.


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Transfer Price: What and Why?

!pproimately "#$ of the total transactions

across the world are between related parties.

%f the transactions are across different ta

&urisdictions' where ta rates are different'

shifting is beneficial.


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(actors !ffecting Transfer Pricing

%nternal factors: Performance )easurementand *valuation

*ternal (actors:+!ccounting ,tandard

+%ncome Ta

+-ustom uty+-urrency (luctuations

+Risk of *propriation


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Transfer Price Regulations

%nternational

/*- formulated

01uidelines ontransfer pricing2. They

serve as generally

accepted practices by

the ta authorities

%ndia

The (inance !ct 3##4

introduced the detailedTPR w.e.f. 4st!pril

3##4

The %ncome Ta !ct

!,546

/ther Relevant !cts


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!ccounting ,tandard 46

Re7uires disclosure of 8any elements of the

related partytransactions necessary for an

understanding of the financial statements9.


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Related Parties

-ontrol by ownership

+ #$ of the voting right

-ontrol over composition of board of directors+ Power to appoint or remove the directors

-ontrol of substantial interest

+ 3#$ or more interest in the voting power


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!,546 and Transactions

Purchase and sale of goods;

Rendering or receiving services;

!gency arrangements;


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%ncome Ta !ct and TP

(inance !ct 3##4 substituted the old sectionof =3 of the %T! by sections =3'=3! to

=3 (. These sections are the backbone of %ndian

TPR.

These sections define the meaning ofrelated parties' international transactions'pricing methodologies etc.


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TPR: ,ome %mportant -oncepts

%ncome>*penses>-ost 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.


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!ssociate *nterprise: =3!

irect -ontrol>-ontrol through intermediary

olding 3"$ of voting power

!dvance of not less than 4$ of the total assets ofborrowing company.

1uarantees not less than 4#$ on behalf ofborrower

!ppointment of more than #$ of the @o

ependence for =#$ or more of the total rawmaterial or other consumables


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%nternational Transactions: =3@

Transaction between two or more !* of

which either both or anyone is a non5

resident.

Transactions:

+Purchase>,ale>


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!rm9s


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!rm9s


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-omparable uncontrolled price

method -AP method compares the price transferred

in a controlled transaction to the price

charged in a comparable un5controlledtransaction.

-AP method is the most direct and reliable

way to apply the arm9s length principle.


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Resale price method

The resale price method begins with the

price at which a product is resold to an

independent enterprise B%*Cby an associateenterprise.

+D sold to !* at Rs. 4### Bprofit: E##C

+!* sold to an %* at Rs. 3### Bprofit of Rs. ## for relevant %*C

+!rms length price F 3### 5 ## F 4##


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Profit ,plit )ethod

P,) is used when transactions are inter5

related and is not possible to evaluate

separately. P,) first identifies the profit to be split for

the !*. The profit so determined is split

between the !* on the basis of thefunctions performed>assets>-*


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-ost Plus )ethod

%n -P method' first the cost incurred is

determined. !n appropriate cost plus mark5

up is then added to the cost to arrive at anappropriate profit. The resultant figure is the

arm9s length price.


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,ome Transactions sub&ect to !

Purchase above )P

%nterest free

borrowings

*changing property

,elling of real estate at

a price different from)P

Ase of trade names or

patents at eorbitant

rates even after their

epiry.


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,ome -ases

Peico *lectronics I *lectricals


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Comp$ters 4% 2% 4 4 16% 8%

Softare 10% 10% 2 2 15% 20%

oos 4% 5% 3 2 10% 10%

#erall 671% 571% 274 276 14740% 13751%

RS Sales(!sset RI

transfer pricing(2)

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