Applicability of Transfer Pricing and Base Erosion – International Taxation Case Study
Identify whether transfer pricing provisions would be applicable on the following transactions : –
- Interest free loan given to the Indian company by its parent
- Interest free loan given by the Indian company to its wholly owned subsidiary in Japan
- Free laptops provided by Alpha USA to who is Associated Enterprise, B Ltd India
- Machinery provided by Beta Pty Singapore, to its wholly owned subsidiary in exchange of BPO services provided by the WOS.
Applicability of Transfer Pricing and Base Erosion – International Taxation Case Study – Solution:-
Transfer Pricing regulations are designed to prevent shifting of profits, by manipulating prices charged by overseas entity or paid by Indian entity in international transactions, thereby eroding the country’s tax base. However in certain cases, application of the Transfer Pricing provisions, may result in reduction of profits taxable in India or increase the expenses, allowable as a deduction for Indian tax purposes. In such cases, Transfer Pricing provision are not required to be applied where the adoption of the arm’s length price would result in a decrease in the overall tax incidence in India in respect of the parties involved in the international transaction. In view of this, the specific comments are as under : –
| Particulars | Amount |
| Interest free loan given to the Indian company by its parent | NA – Charging of interest would reduce taxable profits of Indian entity. |
| Interest free loan given by the Indian company to its wholly owned subsidiary in Japan | Applicable – Charging of interest would increase taxable profits of Indian entity. |
| Free laptops provided by Alpha USA to who is Associated Enterprise, B Ltd India | NA – Charging of depreciation of price of laptops would reduce taxable profits of B Ltd India |
| Machinery provided by Beta Pty Singapore, to its wholly owned subsidiary in exchange of BPO services provided by the WOS. | Applicable – Charging of service fee for BPO services would increase taxable profits of Indian entity. Benchmarking machinery cost would ensure adequate depreciation is charged that would impact taxable profits of Indian entity. |
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