With globalization in effect, there is a significant rise in the number of multinational companies. It's a fact that around 60% of world trade proceeds within multinational enterprises. Hence, transfer pricing has become an interest not only for tax administrators but also for economists, NGOs, business persons, and politicians who are waking up to the call. Here in this article, we are going to learn about all the risk factors and benefits of Transfer Pricing.
It's much of people's interest knowing who is paying tax and who is not when business transactions between different arms of multinationals take place.
It's an evident case that through transfer pricing companies can deprive tax authorities in different jurisdictions of their fair share of taxes. No matter if we consider a wealthy, emerging or poor country nobody wants suffering from its tax base because of transfer pricing.
“Transfer price” means the price charged for transfer for goods or services. However, as far as tax is concerned, in common parlance, “Transfer pricing: is considered as price charges for transfer of goods or service between associate entities.
For example: Let's assume a UK computer manufacturer group buys the computer microchips from its own subsidiary in India. Now, the amount the parent UK company pays to its subsidiary in India for the microchips is the amount of profit the subsidiary unit can represent and need to pay tax for that.
The price charged by a subsidiary company from its holding company can be arbitrary and dictated and such arrangement may result in avoidance or reduction of tax liability. Accordingly, provisions of “Transfer pricing” given under the Income Tax Act can be used to actual uncontrolled prices.
Transfer Pricing is nothing but the value attached to goods or services transferred in between related parties. More precisely speaking, it is the price paid for products and services transferred from a unit to other units of an organization or transfer of goods or services between associate/related enterprises.
While transfer pricing has several objectives here, we are going to discuss the two most prominent among them.
Legal entities under a single corporation can have several branches where the companies which are wholly or the major share can be owned by the parent corporation. There are many jurisdictions who consider business entities within a common control if they share family members on the list of their board of directors.
Transfer pricing plays an instrumental role to allocate profit to a multinational corporation when it comes to clear tax liabilities in different countries where they do business. It basically allows setting the price among divisions inside an enterprise.
Transfer pricing offers tax advantages to multinational companies but often or not regulatory authorities tend to use it for tax avoidance.
Furthermore, Through transfer pricing companies can ensure profits for goods and services in different countries which have a lower tax rate. Organization for Economic Cooperation and Development (OECD) regulates international tax laws.
In the case of international goods and service exchanges where the transfer of service and goods takes place from one country to another through an interrelated company, the transaction can allow the company to avoid tariffs on the exchange.
Therefore, principles of transfer pricing are used to determine “Arm’s length price” for the transaction that took place between associate entities so that any avoidance or reduction of tax liability can be mitigated. Under transfer pricing, various principles are there to determine “Arm’s Length price” considering transaction took place between independent parties.
ここまでで、移転価格の定義とその仕組みについて理解できたかと思います。次に、移転価格に伴うリスクとメリットについて解説します。
そのため、「移転価格」に関する規定は、こうした事態を回避するために設けられています。
移転価格には一定のメリットがある一方で、無視できないリスクも存在します。詳細については以下をご覧ください。
規模の大小を問わず、移転価格は多くの企業にとって国際的な税務課題となっています。移転価格を適切に活用すれば、グローバルな規制を遵守しつつコスト削減を実現できます。
組織の透明性を維持するためには、移転価格のリスクとメリットを把握した上で、移転価格戦略と関連文書を見直すことが不可欠です。
本記事では移転価格の基本的なリスクとメリットの大部分を解説しましたが、これ以外にも議論すべき点は多く、それらは本稿の範囲外となります。
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