In the field of trade and industry, transfer pricing is a word frequently used. If you are looking to start a company, before you do so, you must know about the importance of this word. The term transfer pricing means the nominal benefit applied to the transfer between the two trade partners in services or products.
What is transfer pricing?
Indian tax laws demand an annual assessment of whether businesses with overseas group organizations (sales, acquisitions, services rendered, loans, management fees, royalty payments) meet the ‘arms-length’ criterion of their transactions. Regulations require both a comprehensive (TP) study by the company and a TP audit report by an impartial auditor.
What to expect?
Mostly, companies that provide services related to transfer pricing in India, like Dewan P.N. Chopra & Co. deal with the following things:
- Benchmarking research for firms to measure margins and mark-ups in India in their field
- Annual transfer pricing reports, calculating the possible mark-up that an Indian organization will receive/pay from/to its overseas community entities on products and services
- Transfer pricing audit report as recommended by the revenue tax authorities in Form 3CEB
- Liaising with tax authorities in the form of appraisal, scrutiny, or controversy
- Tax preparation and optimization for domestic and offshore firms when taking into account the conditions for transfer pricing, international tax, double tax evasion, foreign exchange, and other direct/indirect tax requirements for Indian companies
- Examination of current policy/documentation to amend and reinforce policies
Price of commodities
The principle of transfer pricing thus applies to the price charged for the commodities which are moved from one particular economic unit to another, in the light of the fact that the two units are situated in two different countries and belong to the same multinational business. Thus, a transfer price is the amount of money paid on a single purchase. The sale price shall, in the case of international purchases, be the concrete price paid between allied undertakings.
Transfer pricing problems can occur when various multinational commercial institutions based in different jurisdictions plan to transfer services or properties to each other. These organizations seldom perform their transactions at arm’s length, which is why ordinary market powers will not regulate the dealings between such organizations.
In situations where the value of the sale price is different from the value which would have been correctly paid, and if the undertakings were not related, the tax benefit is the result.
The tax sum is determined in such situations based on the arm’s length price. The sale price acts as the amount added to the sale of two associated institutions of services, products, and technologies. In this way, the holding corporation and its branches are also attributed to them.
Parties that are governed by a mutual body may also be concerned. The meaning of transfer pricing is that any independent transfer is not determined. Furthermore, the contract between these two parties is not subject to open market considerations. The very essence of transfer pricing is contributing to a benefit transition.
In other terms, the profit that a given jurisdiction is rightly attributable to is then passed to the other jurisdiction. Its primary goal is to remain free of tax and thus to efficiently withdraw revenues while leaving nothing for local involvement that can then be equitably shared. The evasion of foreign exchange constraints is another reason why this approach is practised.