Why is transfer pricing important

As it is discussed earlier that Transfer Pricing is attracted in the case of transactions between the related parties and not with non-related companies. So, there is the possibility of difference in prices among such transactions. There are a lot of factors due to which differences are witnessed in the transactions with related and unrelated parties. Due to these reasons, it becomes necessary to regulate Transfer Pricing.

Generally, transfer pricing schemes have been seen to be applicable in International business transactions only. But, it does not mean that it could not be applied to Domestic transactions.

It could be individual assessee, shareholder or even a partner in that business. Its main objective is to ensure that transactions between associated enterprises take place at a price as if the transaction was taking place between unrelated parties. Through Transfer Pricing Rules, the companies are able to maintain their business structure in a flexible manner.

Effective planning schemes, allow the taxpayers to optimize the allocation of their income within their related group. But, it is also very important to comply with the transfer pricing rules so that the companies do not suffer consequences of double taxation at a later stage. Non- compliance can lead to expensive consequences for such multinational companies. It can also result in disputes with tax authorities that can further lead to litigation and substantial penalties.

As it is mentioned earlier that the practice of Transfer Pricing is not abusive in itself but it can become illegal or abusive; it is used for evading the taxes or manipulating the prices of the goods. But any business entity runs for the purpose of earning as much profit as it is possible for them and while doing so they want to reduce the burden of tax so that that they can enjoy more of their earnings.

The entities sometimes; for the purpose of achieving this goal engage themselves in such kind of malpractices that are abusive in nature and can lead to later consequences. Transfer pricing is one of the many schemes that play a key role in supporting the multinational business entities in expanding their business globally and reducing the tax burden. The business entities sometimes, take advantage of this and manipulate the prices entirely. Such kind of practices necessitates the regulation of Transfer Pricing.

Transfer pricing regulates the pricing scheme of the transactions taking place within the same groups or related entities to avoid further abuse. It decides strategies to calculate appropriate prices that are acceptable under such regulations. In India, the dire need was felt for the first time in the year and India introduced its first Transfer Pricing Regulations in the year itself via Finance Act that came into force from the financial year March Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

Save my name, email, and website in this browser for the next time I comment. Check your mailbox for the joining link. The end of the Brexit transition period also presents challenges. Changes to business operations in response to Brexit may have resulted in a shift of value within groups. Consequently, existing transfer pricing methodologies may no longer be appropriate. In addition, the valuation of goods for customs purposes may change.

Pricing must be compliant for both customs regulations and transfer pricing, but these can have conflicting requirements. On 23 March , however, the UK Government launched a consultation on transfer pricing documentation considering two areas:. While there is likely to be some flexibility for smaller multinational entities to continue to adapt their documentation approach proportionate to the complexity of the business, larger businesses may need to adapt or update their approach in the future.

If the IDS is adopted, there will also be increased transparency on intragroup transactions. In the UK an exemption from transfer pricing rules is available to many small and medium-sized enterprises SMEs in some circumstances.

The SME definition is met if a group is within the headcount limit and one or both of the financial limits. Medium-sized groups are only able to place limited reliance on the exemption, as they can still be issued with a notice by HMRC to calculate profits by applying transfer pricing principles. Profit fragmentation rules, in effect from 1 April , apply to all business including SMEs. Aimed at reducing offshore tax avoidance, these are very broad in scope. These new rules will particularly impact those groups that had previously relied on the SME exemption.

Where groups do not currently have defined transfer pricing policies, we can assist in understanding intercompany arrangements and preparing transfer pricing documentation. For those groups with existing policies, we can review and provide recommendations to help ensure that these reflect any changes in the group and are aligned with the latest transfer pricing guidance.

The financial reporting of a company helps to keep a check on the transfer pricing. A company using transfer pricing needs to maintain all documents, as well as mention them in the footnotes in the financial statements. It allows auditors, regulators, and investors to review such transactions. If found inappropriate, a company can be made liable to pay fines, as well as more taxes.

Assume there are two companies X and Y. Both these firms belong to XYZ. The market demand and supply determine the selling price of the mobile. Even though both companies belong to XYZ, both have their entity as well. So, the sale price does impact their financial results. Meaning, if Company X charges more for mobile, then it makes more profit, and Y makes less profit and vice versa.

However, for XYZ, it does not matter which of two makes more profit. In both cases, the results will be better for XYZ. But, for tax, it matters which of two make more profit. It will direct X to transfer mobiles to Y at a lower price. In this way, Company X will make less profit, hence less tax liability. Company Y will make more profit, but since the tax rate on Hong Kong is less, the tax liability comes down.