TRANSFER PRICING: MEANING & OBJECTIVE
- Blog|Transfer Pricing|
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- 3 Min Read
- By Taxmann
- Last Updated on 17 March, 2021
What is Transfer Pricing in India?
Arm’s Length Principle Applied to Transfer Pricing And Attribution of Profits to PE:
The arm’s length principle is applied both in the context of transfer pricing and attribution of profits. Such an application makes no distinction between a branch or a subsidiary through which an MNE carries on business in a country. A functionally separate entity approach as a working hypothesis underlying the application of the arm’s length principle, is found in almost all tax treaties.
Transfer Price is Not Arm’s Length Price:
Transfer price is the price charged in a transaction. The term ‘transfer price’ is used to describe the actual price charged between the associated enterprises in an international transaction. Transfer pricing issues arise when entities of multinational corporations resident in different jurisdictions transfer property or provide services to one another. These entities do not deal at arm’s length and, thus, transactions between these entities may not be subject to ordinary market forces. Where the transfer price is different from the price which would have been charged if the enterprises were not associated and the difference gives rise the tax advantage, the tax is calculated on the basis of arm’s length price.
Aims & Objective Of Transfer Pricing:
1. Transfer pricing minimizes the tax burden or arranging direction of cash flow:
Transfer price, as aforesaid, refers to the value attached to transfer of goods, services, and technology between related entities such as parent and subsidiary corporations and also between the parties which are controlled by a common entity. Its essence being that the pricing is not set by an independent transferor and transferee in an arm’s length transaction. Transaction between them is not governed by open market considerations.
2. Transfer pricing results in shifting profits:
Whatever the reason for fixing a transfer price which is not arm’s length, the result is the shift of profit. The effect is that the profit appropriately attributable to one jurisdiction is shifted to another jurisdiction. The main object is to avoid tax as also to withdraw profits leaving very little for the local participation to share. Other object is avoidance of foreign exchange restrictions.
3. Shifting of Profits- Tax avoiding not the only object:
Transfer between the enterprises under the same control and management, of goods, commodities, merchandise, raw material, stock, or services is made at a price which is not dictated by the market but controlled by such considerations such as: • To reduce profits artificially so that tax effect is reduced in a specific country; • To facilitate decentralization of production so that efforts are directed to concentrate profits in the State of production where there is no or least competition; • To remit profits more than the ceilings imposed for repatriation; • To use it as an effective tool to exploit the fluctuation in foreign exchange to advantage.
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