8/3/2019 Transfer Prcing
1/19
TRANSFER PRICING
8/3/2019 Transfer Prcing
2/19
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.
8/3/2019 Transfer Prcing
3/19
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
8/3/2019 Transfer Prcing
4/19
Ideal situation
Competent people
Good atmosphere Market Price
Freedom of choice
Full informationNegotiation
8/3/2019 Transfer Prcing
5/19
Factors Affecting Transfer Pricing
Internal factors: Performance Measurement andEvaluation
External Factors:Accounting Standard
Income Tax
Custom Duty
Currency Fluctuations Risk of Expropriation
8/3/2019 Transfer Prcing
6/19
Methods of Transfer pricing
Comparable Uncontrolled Price Method
Resale price methodCost plus method
Transactional Profit Methods
8/3/2019 Transfer Prcing
7/19
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).
8/3/2019 Transfer Prcing
8/19
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
8/3/2019 Transfer Prcing
9/19
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).
8/3/2019 Transfer Prcing
10/19
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.
8/3/2019 Transfer Prcing
11/19
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.
8/3/2019 Transfer Prcing
12/19
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
8/3/2019 Transfer Prcing
13/19
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.
8/3/2019 Transfer Prcing
14/19
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.
8/3/2019 Transfer Prcing
15/19
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.
8/3/2019 Transfer Prcing
16/19
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/Tax8/3/2019 Transfer Prcing
17/19
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/Corporations8/3/2019 Transfer Prcing
18/19
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.
8/3/2019 Transfer Prcing
19/19
THANK U. .