Transfer Pricing

What Is a Transfer Price?

Transfer price is the specific price whereby divisions of an organization transact with each other, such as labor between departments or the trade of supplies. Transfer prices are usually used when individual bodies of a larger multi-national firm are measured and treated as separately run entities. Nowadays transfer pricing is of immense value for both tax authorities and multinational companies. Transfer price is also known as a transfer cost. Transfer pricing affects the total amounts paid as corporate tax. The stringent need for resources and economic conditions of the state budget have resolute the tax authorities to concentrate more on transfer pricing. Transfer pricing or Transfer cost is also strengthened by the work of OECD concerning the profit shifting and base erosion.

Transactions subject to Transfer pricing

Some of the distinctive international transactions that are administered by the transfer pricing rules are:

• Sale of finished goods;
• Purchase of fixed assets;
• Purchase of raw material;
• Purchase or sale of machinery etc.
• Technical Service fees;
• Sale or purchase of Intangibles.
• Support services;
• Reimbursement of expenses received/paid;
• Management fees;
• IT Enabled Services;
• Royalty fee;
• Software Development services;
• Loan received or paid.
• Corporate Guarantee fees;

What are the purposes of Transfer Pricing?

The major objectives of transfer pricing are:

• Making a separate profit for each division and separately allowing performance evaluation of each division.
• Transfer prices not only affects every center’s reported profits but also affects the allocation of a company’s resources.

What are the benefits of transfer pricing?

1. Transfer Pricing maximizes the total profit of the subsidiaries
2. It enables parent company’s to control over its subsidiary
3. It offers sufficient source, both to international divisions and product divisions to receive credit for their profitability.
4. Transfer pricing is used to decrease tax incidence with suitable transfer pricing TNCs and to reduce high direct and indirect tax both in host countries and home country.
5. Transfer pricing is used as a marketing technique. It supports a market brand of a product or improves its market share.
6. Transfer pricing is used by a TNC to minimize the profit-sharing by the collaborator with it.
7. Transfer pricing is also used to protect the adverse impact of the volatile exchange rate.

Why Companies must understand Transfer Pricing?

Companies need to understand Transfer Pricing for management of reporting, accounting and, multinational companies. Some amount of discretion occurs while outlining how to allocate the expenses and profits to the subsidiaries positioned in various countries. The subsidiary company might be distributed into segments or accounted for as a standalone business. Moreover, transfer pricing assists in allocating expenses and revenue to such subsidiaries in the proper manner.

The profitability of a subsidiary is determined by the prices at which the inter-company transactions take place. The inter-company transactions are facing amplified scrutiny by the governments. At this point, when transfer pricing is applied, it could influence shareholders wealth as this impacts the company’s taxable free cash flow, income and its after-tax.

Significantly, a business having intercompany cross-border transactions should understand the concept of transfer pricing, mainly for the compliance requirements as per law and abolish the risks of non-compliance.

How Transfer Pricing affects Companies?

• Transfer pricing largely affects the total amounts paid as corporate tax.
• Transfer pricing affects cash flow, performance indicators and, investment decisions
• Transfer pricing affects the custom value
• Transfer pricing can involve expense or revenue adjustments which trigger double taxation.
• Transfer pricing can assist an organization to recognize opportunities for business optimization
• Transfer pricing is substance to legal requirements

How ASC helps on a complex matter related to Transfer Pricing?

• Analyzing transactions and preparation of Transfer Pricing Study /Reports
• Issuance of Transfer Pricing Certificates
• Evaluating & formalizing Advance Pricing Agreements
• Compliances for Country-by-country Reporting and Master File.
• Structuring & arrangement of related party transactions