Transfer pricing refers to the prices charged for transactions between related parties. It is important for tax purposes as multinational groups can use transfer pricing to minimize taxes by shifting profits between jurisdictions with different tax rates. The arm's length principle requires transfer prices to be the same as if the parties were unrelated. There are several methods to determine appropriate transfer prices such as the market rate method, adjusted market rate method, and transactional net margin method which compares the profit of related party transactions to similar uncontrolled transactions. Factors that influence transfer pricing include tax rates, currency fluctuations, and regulations from bodies like the OECD.

1. TRANSFER PRICING
FM9

6. Transfer Price:What andWhy?
•TP means the value or price at which transactions take
place amongst related parties.
•TP are the prices at which an enterprise transfers
physical 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 to minimise tax
incidence.

7. •Approximately 60% of the total transactions across the
world are between related parties.
•If the transactions are across different tax jurisdictions,
where tax rates are different, shifting is beneficial.

9. Methods ofTRP
Market Rate Transfer pricing :
The simplest and most elegant transfer price is to use the market
price. By doing so, the upstream subsidiary can sell either internally
or externally and earn the same profit with either option. It can also
earn the highest possible profit, rather than being subject to the odd
profit vagaries that can occur under mandated pricing schemes.
Adjusted Market Rate Transfer Pricing :
If it is not possible to use the market pricing technique just noted,
then consider using the general concept, but incorporating some
adjustments to the price. For example, you can reduce the market
price to account for the presumed absence of bad debts, since
corporate management will likely intervene and force a payment if
there is a risk of non-payment

12. Factors AffectingTransfer Pricing
• Internal factors:
• Performance Measurement and Evaluation
• External Factors:
• Accounting Standard
• IncomeTax
• Custom Duty
• Currency Fluctuations
• Risk of Expropriation

13. Expropriation is the act of a government taking privately
owned property against the wishes of the owners, ostensibly
to be used for the benefit the overall public
In the United States, properties are most often expropriated
in order to build highways, railroads, airports, or other
infrastructure projects.The property owner must be paid for
the seizure, since the Fifth Amendment to the Constitution
states that private property cannot be expropriated "for public
use without just compensation."

14. Transfer Price Regulations
International
•OECD formulated “Guidelines on transfer pricing”.They
serve as generally accepted practices by the tax
authorities
•The Organisation for Economic Co-operation and
Development (OECD) is an international organisation
that works to build better policies for better lives.Their
goal is to shape policies that foster prosperity, equality,
opportunity and well-being for all.

15. India
•The Finance Act 2001 introduced the detailedTPR w.e.f.
1st April 2001
•The IncomeTax Act
•AS-18 (Accounting Standard 18 requires disclosure of
‘any elements of the related party transactions
necessary for an understanding of the financial
statements’.)
•Other RelevantActs

16. The "arm's-length principle" of transfer
pricing
•states that the amount charged by one related party to
another for a given product must be the same as if the
parties were not related. An arm's-length price for a
transaction is therefore what the price of that
transaction would be on the open market.

22. TheTransactional Net Margin Method
•With theTransactional Net Margin Method (TNMM), you
need to determine the net profit of a controlled
transaction of an associated enterprise.This net profit is
then compared to the net profit realized by comparable
uncontrolled transactions of independent enterprises.
•As opposed to other transfer pricing methods, the
TNMM requires transactions to be “broadly similar” to
qualify as comparable

23. •Transfer pricing methods are quite similar all around the
world.The OECD Guidelines provide five transfer pricing
methods that are accepted by nearly all tax authorities.
•A taxpayer should select the most appropriate method. In
general, the traditional transaction methods is preferred
over the transactional profit methods and the CUP method
over any other method.
•In practice, theTNMM is the most used of all five transfer
pricing methods, followed by the CUP method and Profit
Split method. Cost Plus Method and Resale Margin Method
are barely used.