Transcript Transfer Pricing

Transfer Pricing
Regulations
C Transfers to X
Cost to C
SP of X
Tax Rate for C
Tax Rate for X
Impact of TP
S-I
S-2
S-3
S-4
S-5
200
280
300
400
500
100
100
100
100
100
300
300
300
300
300
20%
60%
SP
Cost
PBT
Tax
PAT
SP
Cost
PBT
Tax
PAT
C
200
100
100
20
80
C
400
100
300
60
240
S-1
X
300
200
100
60
40
Total
500
300
200
80
120
S-4
X
300
400
-100
C
280
100
180
36
144
Total
700
500
200
60
240
S-2
X
300
280
20
12
8
Total
580
380
200
48
152
C
500
100
400
80
320
C
300
100
200
40
160
S-5
X
300
500
-200
S-3
X
300
300
0
0
0
Total
600
400
200
40
160
Total
800
600
200
80
320
Transactions
Internal
External
(Within the country)
(outside the country)
Inter Company
Revenue Profit
Capital Gain
Royalty
Intra Company
Inter Comapny
Control System
Non-Related:
cost centres
Profit/Dividend/Royalty
revenue centres
Forex Fluctuations
profit/Investment centre
Accounting
Related
Profit/Dividend/Royalty
Transfer Pricing
Forex/Accounting
Intra Company
Control Systems
Forex Fluctuations
Accounting
Transfer Pricing
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 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.
Transfer Price: What and Why?
• 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.
Factors Affecting Transfer Pricing
• Internal factors: Performance Measurement
and Evaluation
• External Factors:
–
–
–
–
–
Accounting Standard
Income Tax
Custom Duty
Currency Fluctuations
Risk of Expropriation
Transfer Price Regulations
International
• OECD formulated
“Guidelines on
transfer pricing”. They
serve as generally
accepted practices by
the tax authorities
•
•
•
•
India
The Finance Act 2001
introduced the detailed
TPR w.e.f. 1st April
2001
The Income Tax Act
AS-18
Other Relevant Acts
Accounting Standard 18
Requires disclosure of ‘any elements of the
related party transactions necessary for an
understanding of the financial statements’.
Related Parties
• Control by ownership
– 50% of the voting right
• Control over composition of board of directors
– Power to appoint or remove the directors
• Control of substantial interest
– 20% or more interest in the voting power
AS-18 and Transactions
•
•
•
•
•
•
•
•
•
Purchase and sale of goods;
Rendering or receiving services;
Agency arrangements;
Leasing arrangements;
Transfer of research and development;
Licence aggrements;
Finance
Guarantees and collaterals;
Management contracts.
Income Tax Act and TP
• Finance Act 2001 substituted the old section
of 92 of the ITA by sections 92,92A to
92 F.
• These sections are the backbone of Indian
TPR.
• These sections define the meaning of
related parties, international transactions,
pricing methodologies etc.
TPR: Some Important Concepts
• Income/Expenses/Cost arising from an
international transaction shall be computed
having regard to arm’s length price
(ALP).
• ALP provisions can be applied if it
leads to decrease in taxable income or
increase in losses.
Associate Enterprise: 92A
• Direct Control/Control through intermediary
• Holding 26% of voting power
• Advance of not less than 51% of the total assets of
borrowing company.
• Guarantees not less than 10% on behalf of
borrower
• Appointment of more than 50% of the BoD
• Dependence for 90% or more of the total raw
material or other consumables
International Transactions: 92B
• Transaction between two or more AE of
which either both or anyone is a nonresident.
• Transactions:
– Purchase/Sale/Lease
– Provision of service
– Lending or borrowing
Arm’s Length Price
• Price which two independent firms would
agree on.
• Price which is generally charged in a
transaction between persons other than
associated enterprises.
Arm’s Length Price: 92C
•
•
•
•
Comparable uncontrolled price method
Resale price method
Cost plus method
Profit split method
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 arm’s length principle.
Resale price method
• 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
Profit Split Method
• PSM is used when transactions are interrelated and is not possible to evaluate
separately.
• PSM first identifies the profit to be split for
the AE. The profit so determined is split
between the AE on the basis of the
functions performed/assets/CE
Cost Plus Method
• In CP method, first the cost incurred is
determined. An appropriate cost plus markup is then added to the cost to arrive at an
appropriate profit. The resultant figure is the
arm’s length price.
Some Transactions subject to ALP
• Purchase at little or no
cost.
• Payment for services
never rendered.
• Sales below MP/
Purchase above MP
• Interest free
borrowings
• Exchanging property
• Selling of real estate at
a price different from
MP
• Use of trade names or
patents at exorbitant
rates even after their
expiry.
Some Cases
• Kinetic Honda Motors
– Collaborator: Honda Motor Co. Ltd Japan and
their Subsidiary Honda Trading Corpn. Japan
• Hero Honda Motors Ltd.
– Parent: Honda Motor Co. Ltd Japan and their
Subsidiary Honda Trading Corpn. Japan
Some Cases
• Peico Electronics & Electricals Ltd.
– Parent: Phillips Netherlands and its subsidiaries
• Asea Brown Boveri
– Parent: ABB Switzerland and its subsidiaries
• Videocon Group
– Collaborators: Toshiba Co., Mitsubishi Co
ROS
Computers 4%
Software 10%
Books 4%
Overall 6.1%
2%
10%
5%
5.1%
Sales/Asset
ROI
4
4 16% 8%
2
2 15% 20%
3
2 10% 10%
2.4 2.6 14.40% 13.51%