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TRANSFER PRICING

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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 tominimize tax incidence.

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Objectives of Transfer Pricing It provides each unit with the relevant

information required for making cost-benefit

trade-off. It induces the goal congruence among business

units and corporation.

It helps in measuring the performance ofindividual profit centers

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Ideal situation

Competent people

Good atmosphere Market Price

Freedom of choice

Full informationNegotiation

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Factors Affecting Transfer Pricing

Internal factors: Performance Measurement andEvaluation

External Factors:Accounting Standard

Income Tax

Custom Duty

Currency Fluctuations Risk of Expropriation

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Methods of Transfer pricing

Comparable Uncontrolled Price Method

Resale price methodCost plus method

Transactional Profit Methods

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Comparable Uncontrolled Price Method

CUP method compares the price transferred in a

controlled transaction to the price charged in a

comparable un-controlled transaction.

CUP method is the most direct and reliable way to

apply the arms length principle(Price which is

generally charged in a transaction between persons

other than associated enterprises).

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Resale price method

Method uses comparable profits in unrelated-party sale of

tangible goods to determine profit ratios

The resale price method begins with the price at which a product

is resold to an independent enterprise (IE)by an associate

enterprise.

X sold to AE at Rs. 1000 (profit: 300)

AE sold to an IE at Rs. 2000

(profit of Rs. 500 for relevant IE)

Arms length price = 2000 - 500 = 1500

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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. This comparable gross mark-up isdetermined in two ways, by reference to:

The cost plus mark-up earned by a member of the group in

comparable uncontrolled transactions (internal

comparable). The cost plus mark-up earned by an arm's length enterprise

in the comparable uncontrolled transactions (external

comparable).

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The more comparable the functions, risks and assets, the more

likely it is that the cost plus method will produce an appropriateestimate of an arm's length result.

In general, for purposes of applying a cost-based method, costs

are divided into three categories:

1.Direct costs such as raw materials;2.Indirect costs such as repair and maintenance which may be

allocated among several products; and

3.Operating expenses such as selling, general, and

administrative expenses.

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Properly determining cost under the cost plus method is

important. Cost is usually calculated in accordance with

accounting principles that are generally accepted for that

particular industry in the country where the goods are

produced.

For example, If the comparable party includes a particular

item as an operating expense, while the tested party

includes the item in its cost of goods sold, the cost base of

the comparable must be adjusted to include the item.

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Transactional Profit Methods

Traditional transaction methods are the most reliable

means of establishing arm's length prices or

allocations. However, the complexity of modern

business situations may make it difficult to apply these

methods. Where the information available oncomparable transactions is not detailed enough to

allow for adjustments necessary to achieve

comparability in the application of a traditional

transaction method, taxpayers may have to considertransactional profit methods.

Profit split method

Transactional net margin method

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Profit split method

Under the profit split method: The first step is to determine the total profit earned by the

parties from a controlled transaction. The profit split method

allocates the total integrated profits related to a controlled

transaction, not the total profits of the group as a whole. Theprofit to be split is generally the operating profit, before the

deduction of interest and taxes.

The second step is to split the profit between the

parties based on the relative value of their contributions to thenon-arm's length transactions, considering the functions

performed, the assets used, and the risks assumed by each non-

arm's length party.

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The profit split method may be applied where:

The operations of two or more non-arm's length

parties are highly integrated, making it difficult toevaluate their transactions on an individual basis;and

The existence of valuable and unique intangiblesmakes it impossible to establish the proper level ofcomparability with uncontrolled transactions toapply a one-sided method.

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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; and

Examines the net profit margin relative to an appropriate basesuch as costs, sales or assets.

Because the TNMM is a one-sided method, it is usually applied

to the least complex party that does not contribute to valuable or

unique intangible assets. Since TNMM measures the

relationship between net profit and an appropriate base such as

sales, costs, or assets employed, it is important to choose the

appropriate base taking into account the nature of the business

activity.

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DOUBLE TAX TREATY

DOUBLE TAXATION is the imposition of two ormore taxes on the same income (in the case of income

taxes), asset (in the case of capital taxes), or financial

transaction (in the case of sales taxes). It refers to

taxation by two or more countries of the same income,

asset or transaction, for example income paid by an

entity of one country to a resident of a different country.

The double liability is often mitigated by tax

treaties between countries.

http://en.wikipedia.org/wiki/Taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Wealth_taxhttp://en.wikipedia.org/wiki/Financial_transactionhttp://en.wikipedia.org/wiki/Financial_transactionhttp://en.wikipedia.org/wiki/Sales_taxeshttp://en.wikipedia.org/wiki/Tax_treatyhttp://en.wikipedia.org/wiki/Tax_treatyhttp://en.wikipedia.org/wiki/Tax_treatyhttp://en.wikipedia.org/wiki/Tax_treatyhttp://en.wikipedia.org/wiki/Tax_treatyhttp://en.wikipedia.org/wiki/Sales_taxeshttp://en.wikipedia.org/wiki/Sales_taxeshttp://en.wikipedia.org/wiki/Sales_taxeshttp://en.wikipedia.org/wiki/Financial_transactionhttp://en.wikipedia.org/wiki/Financial_transactionhttp://en.wikipedia.org/wiki/Financial_transactionhttp://en.wikipedia.org/wiki/Wealth_taxhttp://en.wikipedia.org/wiki/Wealth_taxhttp://en.wikipedia.org/wiki/Wealth_taxhttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tax

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Corporations are often also subject to double taxation,

as they are taxed on their income as a legal entity andthen again at the individual level when they pay

distributions to their shareholders. The opposite of this

is called pass-through taxation, where a business entity

is not taxed as a legal entity; instead, its profits aretaxed at the individual level after they have paid

distributions. Business entities which benefit from pass-

through taxation include S-Corporations , LLCs , and

partnerships, and this is a significant advantage over

other business forms which are subject to double

taxation.

http://en.wikipedia.org/wiki/Corporationshttp://en.wikipedia.org/w/index.php?title=S-Corporations&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=LLCs&action=edit&redlink=1http://en.wikipedia.org/wiki/Partnershipshttp://en.wikipedia.org/wiki/Partnershipshttp://en.wikipedia.org/w/index.php?title=LLCs&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=S-Corporations&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=S-Corporations&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=S-Corporations&action=edit&redlink=1http://en.wikipedia.org/wiki/Corporations

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CONCLUSIONTransfer pricing is inherent in the way the global

economy is structured with sourcing and consuming

destinations being different, with numerous

organizations operating in multiple countries and mostimportantly due to varying tax and other laws in

different nations. Also nations have to achieve a fine

balance between loss of revenues in the form of

outflow of tax and making their country an attractiveinvestment destination by giving flexibility in Transfer

Pricing.

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THANK U. .