We all have heard of a famous transfer pricing case wherein the Income Tax department had sued a global telecom giant for avoiding thousands of crores of tax by circumventing transfer pricing rules. Many corporations the world over including top technology firms is grappling with Transfer pricing litigations. So, what is Transfer Pricing exactly?
Transfer Pricing deals with the pricing of international transactions between two related entities like a parent and its subsidiary or the entities having some kind of common ownership. It is the price at which related entities transact with each other. The rules for Transfer Pricing are set by the OECD, the Organisation for Economic Cooperation and Development. These rules are formed to prevent global corporations from avoiding taxes, also called Base Erosion and Profit Shifting (BEPS). Transfer Pricing works on the Arm’s length principle, which means two or more entities must do business as if those were independent entities.
India follows the OECD rules on Transfer Pricing i.e. all international transactions between associated enterprises should be conducted according to the arm’s length principle. In 2012 it also brought certain domestic transactions under the ambit of Transfer Pricing.
Transfer price can be arrived by performing the study of comparable transactions in the market and arriving at a price between related parties that aligns with the sector. Other options for arriving at Transfer price are following Safe Harbour approach or an Advance Pricing Agreement (APA). Safe Harbour (SHR) rules define some rules which, if followed the transaction will be considered to be valid. Similarly, APA is an instrument wherein the companies agree beforehand with government authorities on a Transfer price applicable to them. An APA is typically valid for five years.
Global In-house Centers, Technology Captives, or R&D centres of MNCs operating in India must factor in Transfer Pricing while planning to set up operations in India. Transfer pricing litigations impact an organization on multiple fronts – legal costs, the uncertainty of profit/tax and overall loss of brand image.
We, at ScrumStart, enable MNCs to avoid common pitfalls while setting up operations in India to ensure that you as an organization achieve your objective of accessing the global talent in India.
About the Author:
Director of Growth & Operations at ScrumStart, is a technology and business leader with diverse experience in Business Strategy & Operations, Data Analytics, Business Development and Product Management. He has a rich experience in setting up technology operations and practices along with delivering on the strategic goals.