×

New to site? Create an Account


Login

Lost password? (close)

Already have an account? Login


Signup

(close)
Our Expert | Transfer Pricing Books | Transfer Pricing Course | Our Services | Contact Us |
Select

Need of Transfer Pricing.

|

June 1, 2021 |

6 mins read

Need for Transfer Pricing

With the advent of globalisation, transactions across borders have increased manifold, thus operating outside the jurisdiction of domestic laws. Within an unregulated environment, tax evasions and other such unscrupulous activities are bound to happen. In order to prevent such mis-happenings the principle of Transfer Pricing was introduced. Let’s take a brief glance at this concept.

Bird’s Eye view of the ‘Principle of Transfer Pricing’

Principle of International Taxation Transfer Pricing
Transaction between International Parties
Need for Transfer Pricing To determine price of a transaction based on globally accepted principles and estimate quantum tax
Factors required for Determination of Right and Quantum of Tax
  • Determination of country
  • Respective domestic laws
  • DTAA signed between them
Determination of Price Price arrived at after application of Transfer Pricing principle

Business transaction, by a company, can spread over more than one country. For example, if a US company , which has a factory in New York, sells shoes to an Indian customer, it may earn income which is a result of manufacturing activity in USA, and customer located in India. If both India and US want to tax some portion of income earned by the US company, the issue of double taxation would arise. Such transaction can be : –

  • Within the same enterprise (For example, US Head Office selling goods to an India Branch) ;or
  • Between two different enterprise, who may be related to each other (Associated Enterprise) or may not be related to each other (Independent Enterprises).

Lets understand this aspect with the following Diagram 1.1, where Alpha Inc. a US Co, has following transaction with its wholly owned subsidiary Saarthak India Private Limited (SIPL) : –

  • Sale of goods by Alpha Inc. to SIPL or  Purchase of goods by SIPL from Alpha Inc. ;
  • Provision of IT services by SIPL to Alpha Inc. or Availing of services by Alpha Inc.  from SIPL ;

International Taxation Services

Need of Transfer Pricing example

Diagram 1.1

In all such transaction , both India and US, would want to tax the income arising from such transaction on the ground that either the seller   is located in their jurisdiction, or the customer is located in their jurisdiction. To determine the right and quantum of tax of a particular country, the following step are taken : –

1. Determine the country which has the right to tax a particular income

The right to tax is generally, governed by the respective domestic laws of India and US, and the Tax Treaty ( Double Taxation Avoidance Agreement “DTAA”) between these two countries.

2. Determine the price of a transaction to arrive the profits earned by an Enterprise (particularly for related party transaction)

The issue that normally arises in determination of quantum of tax is, what should be the price, which should be considered as a benchmark,  for taxation of income or allowance of expenditure ? The price should be such as would allow both the countries, to arrive at the profits, which should be taxable in either or both of these countries, and help them determine the fair tax , that should be paid by Alpha Inc. and SIPL. This issue is resolved through the method of Transfer Pricing, wherein, a price is determined on the basis of certain globally accepted principles, which serves as a benchmark for taxation of income or allowance of expenditure.

For any queries, please write them in the Comment Section or Talk to our tax expert

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.

LATEST ARTICLES

Deductions under Income Tax available for FY 2022-23

Deductions under Income Tax available for FY 2022-23: With a

Tax Returns and Clarifications under UAE Corporate Tax law

Introduction - Chapter 17 Tax Returns and Clarifications under UAE

Transfer of Tax Loss under UAE Corporate Tax Law

Introduction - Chapter 11- Transfer of Tax Loss under UAE

General Definitions under UAE Corporate Tax Law

Chapter 1: General Definitions under the UAE Corporate Tax Law

Imposition of Corporate Tax and Applicable Rates under UAE Corporate Tax

Introduction - Chapter 2 - Imposition of Corporate Tax and

Taxable Person and Corporate Tax Base under UAE’s Corporate Tax Law

Introduction - Chapter 4 Taxable Person and Corporate Tax Base

Transfer Pricing Books

  • Transfer Pricing in India (Domestic & International)

  • Transfer Pricing (Domestic & International Transactions)