This document discusses transfer pricing in taxation. It defines transfer pricing as the price used for transactions between associated enterprises, which must be determined on an arm's length basis. It notes the rise of intra-group trade has made transfer pricing important for multinational corporations. Proper transfer pricing is necessary for tax calculation, performance evaluation, and statutory compliance. The key issues are determining which country can tax which income and preventing double taxation between countries with overlapping tax claims.

1. TRANSFER PRICING
IN
TAXATION PURVIEW
JIMSHAD AHAMMED K
AJMAL HAKHIM V
M.COM (A&T)

2. TRANSFER PRICE
 The price of goods/services which is used in
accounting for transfer of goods or services from one
responsibility centre to another or from one company
to another associated company.
 Eg: XYZ Co. is expert in providing electrical and
electronic services. It is engaged in providing support
to its associated company as well as it is engaged in
outsourcing contract. If XYZ Co. provides some
services to its associated company, the transaction
should be accounted at price calculated using transfer
price mechanism.

3. WHY TRANSFER PRICING
 Rise of intra group trade – including highly complex
international transactions involving intangibles and
multi-tiered services
 MNC transaction structure determined not only by
open market but also by group driven forces inclined
towards the common interests of the entities of a
group
 Determination of transfer price becomes imperative
 Transfer price to be determined on arms length basis
 Transfer pricing therefore refers to the setting of
prices (arms length price) for transactions between
associated enterprises the transfer of property or
services

4. WHY TRANSFER PRICING
 Helpful in correct pricing of
Product/Services for tax calculation
 Helpful in Performance Evaluation
 Helpful in complying Statutory
Legislations

5. ILLUSTRATION
ABC
H Co
ABC
S Co
XYZ
Country A
Country B
Purchase of
computer
from S Co
“Controlled
Transaction”
Purchase of
computer
from third party
“Uncontrolled
Transaction”

6. ILLUSTRATION-2
PQR
H Co
PQR
S Co
Customer
s
PQR S Co is the distributor of PQR H
Co’s watches in Country B
 Manufacturing Cost to Hco.  $1400
 Distribution Cost to SCo.  $100
 Transfer price  $1500
 Sale price in Country B  $1600
 H Co Profit  $100
 S Co Profit  NIL
(Cost =Revenue)
 Tax authorities of Country B insists that S
Co should atleast report a profit of $100;
thus transfer price to be reduced to $1,400 –
Leads to economic double taxation.
Country A
Country B

7. BASIC ISSUES UNDERLYING IN TP
 The key issues in jurisdiction:
 Which country should tax the income of the group
entities engaged in the transaction?
 What happens if both countries claim the right to
tax the same income?
 If the tax base arises in more than one country,
should one of the country’s give tax relief to prevent
double taxation of the relevant entities’ income, and
if so, which one?
 What needs to be done to minimise profit shifting
from one country to another?

8. BASIC ISSUES UNDERLYING IN TP
 The key issues in valuation:
 Valuation of intra-group transfers that are
prone to manipulations
 With the MNC being an integrated structure
with the ability to exploit international
differentials and to utilise economies of
integration not available to a stand- alone
entity, transfer prices within the group are
unlikely to be the same prices that unrelated
parties would negotiate

9. ARM’S LENGTH PRINCIPLE” (ALP)
 In general arm’s length price means fair price of
goods transferred or services rendered
 To arrange an equitable agreement that will
stand up to legal scrutiny, even
 Though the parties involved may have shared
interests.
 Not specifically used in Article 9 of both OECD
MTC and UN MTC. However it is well accepted
by countries as encapsulating the approach
taken in Article 9 with some differing
interpretations.

10. Transfer pricing rules are essential for countries (for
Tax administration and Tax Payers) in order to
- Protect their tax base;
- Eliminate double taxation ; and
- Enhance cross border trade

11. A STATISTICS
Countries where Transfer Pricing Regulations are in existence
Argentina Australia Austria Belgium Brazil
Canada Chile China Colombia Croatia
Czech Republic Denmark Dominican Republic Ecuador Egypt
Estonia Finland France Germany Hong Kong
Hungary India Indonesia Ireland Israel
Italy Japan Kenya Korea, North Korea, South
Latvia Lithuania Luxembourg Malaysia Mexico
Namibia Netherlands New Zealand Norway Oman
Panama Peru Philippines Poland Portugal
Romania Russia Singapore Slovakia Slovenia
South Africa Spain Sweden Switzerland Taiwan
Thailand Turkey United Kingdom United States Uruguay
Venezuela Vietnam
Countries where Transfer Pricing Regulations is still emerging
Algeria Angola Armenia Aruba Bangladesh
Belarus Bolivia Botswana Bulgaria Burkina Faso
Cambodia Cote d'Ivoire Cyprus El Salvador Ethiopia
Gambia Georgia Ghana Greenland Iceland
Kazakhstan Kuwait Liberia Libya Macedonia
Malawi Mali Mauritania Mauritius Mongolia
Morocco Mozambique Netherlands Antilles Nicargua Nigeria
Pakistan Papua New Guniea Qatar Senegal Sierra Leone
Sri lanka Trinidad and Tobago Ukraine Uzbekistan Zambia
Zimbabwe

12. HISTORY-TRANSFER PRICING
 New indian economic policy 1991- double
taxation
 Commencements of MNCs
 The Finance Act, 2001 introduced law of
transfer pricing in India through Sections
92 to 92F of the Income Tax Act, 1961