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Applicability of Transfer Pricing and Base Erosion

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May 5, 2021

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4 mins read

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:-

International Taxation Services

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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Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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