Know the Increasing Benefits of Transfer Pricing for Businesses and Tax Authorities
From simplifying internal accounting systems for businesses to making it easier for the tax authorities to collect appropriate taxes on cross-country transactions, there are several ways in which transfer pricing makes sense. Check out the top benefits businesses and the tax department can experience with transfer pricing.
Transfer pricing is the price at which related or controlled entities of an enterprise sell their products or services to each other. For instance, a subsidiary might be selling some products to the parent company. So, the price paid by the parent company for the products is the transfer price.
Transfer price generally applies to multinational entities for evaluating the performance of their subsidiaries and branches. Most of the businesses typically use transfer pricing as a method for profit allocation and attribute their net profit or loss before taxes.
Transfer pricing is also known to offer many valuable business benefits, making it essential for a business to focus on this pricing methodology. Even the tax authorities could benefit from this model when implemented correctly. Let us have a look at some of the top benefits-
- Profit Shifting
One of the biggest reasons to consider transfer pricing is profit shifting. With the help of this pricing method, profits attributable to a particular jurisdiction can be shifted to a different jurisdiction. Avoiding taxes is not unlawful, but tax evasion surely is.
As a result, most of the businesses use TP for avoiding high taxes of a particular jurisdiction and withdraw higher profits. Some of the enterprises also use transfer pricing to avoid restrictions related to foreign exchange.
- Reducing Duty Costs
A lot of companies also use transfer pricing to reduce higher duty costs which they would have otherwise incurred without using TP. This is done by shipping the goods to countries that have higher tariff rates at prices that are considerably lower.
This ensures that the base of duty costs for such transactions is low and the company can experience significant cost savings.
- Production Decentralization
An increasing number of companies now use transfer pricing to decentralise their production. This is mostly done to concentrate most of the profits in production states where there is minimum or no competition.
This makes a lot of business sense as it enables businesses to develop a strong foundation at places where the products or services offered by the business are mostly new.
Government Benefitting from Transfer Pricing and New Transfer Pricing Resolutions
TP regulations were first introduced in India in the year 2001 to prevent companies from avoiding taxes. Most of the TP regulations of India are based on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations which was first published in 1995 which is commonly used all over the world.
However, the Indian guidelines are abundantly modified to suit the tax regime of the country better. Just like most other countries, India also applies the basic TP principle, of allocating reasonable profits with the help of ALP (Arm’s Length Pricing), ALP range and using multiple year data. To prevent tax avoidance, the tax authorities have also introduced several measures regarding the reporting needs, three-tiered documentation, and numerous penalties for non-compliance.
With the help of these measures, the tax authorities in India have been able to considerably reduce the number of cases related to tax avoidance with TP. This has also made the whole tax collection process more convenient and transparent for businesses as well as the tax authorities.
When used correctly, transfer pricing can help businesses experience some significant benefits. With the tax department in India tightening the TP regulations, it is essential for businesses to use the pricing method efficiently to experience the advantages.
Businesses can consider hiring transfer pricing professionals to enable compliance in different jurisdictions and have a solid strategy for risk mitigation.