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Tuesday, May 21, 2024

A Basic Introduction to Transfer Pricing in India

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The taxation landscape of India keeps on changing due to new regulations coming now and then. Business organizations have to follow the regulations and cannot evade taxes at any cost. However, to lessen their tax burden, business organizations use several tax management techniques. If done within the legal jurisdiction, tax management techniques like transfer pricing can lower the tax burden on business organizations. Before you indulge in intercompany transfers, you should know about the transfer pricing regulations. Read on to know more about transfer pricing in India.

Understanding transfer pricing in India

Business organizations need to know the concept of transfer pricing before indulging in intercompany transfers. The price for a transaction paid between any two related business entities is called transfer pricing. For example, consider a USA-based retail company that has a subsidiary in India. If the USA-based company charges its India-based company for raw materials, the transaction price will be called transfer price.

Organizations face issues in setting the transfer price within the legal jurisdiction. Usually, in transfer pricing, both the involved business entities are under the same chain of ownership. Transfer pricing in India has gained popularity in recent years. Many organizations are using it successfully to lower tax implications on intercompany transactions.

Regulations in India for transfer pricing

Most of the Indian regulations for intercompany transfers are influenced by the OECD regulations. OECD is an international organization that is conserved with preserving the economy of nations. Regulations in India for intercompany transfers are given below:

  • An intercompany transfer should occur the same as it would have occurred between two non-related companies. A company cannot provide obvious benefits to its subsidiary during intercompany transfers.
  • For determining the transfer price, companies in India have to find out the ALP (Arm’s Length Price). ALP is calculated considering the entities are unrelated and the transaction environment is uncontrolled. There are several OECD-approved methods for calculating ALP like, CPM, CUP, TNMM, PSM, and RPM.
  • For determining the transfer price, organizations in India can use fiscal data not more than 2 years old. Previous-year fiscal data is often analyzed during benchmark analysis.
  • Business organizations in India can be asked to prove that tax avoidance was not the ultimate aim of any intercompany transfer. Also, an intercompany transfer should be registered as a commercial transaction.
  • It is compulsory for business organizations in India to document intercompany transfers. Your transfer pricing file should have a local file, master file, and a nation-by-nation report.

Tips for transfer pricing 

Hiring transfer pricing experts as full-time employees can be a challenging task. To slash hiring/training costs, you can outsource transfer pricing activities. Transfer pricing activities can be outsourced to CA firms in India. You don’t have to focus on complex transfer pricing laws, as transfer pricing experts will do it for you. In the meanwhile, you can focus on your business missions. Transfer pricing experts help you follow the regulatory norms while making an intercompany transfer. Know more about transfer pricing regulations via expert advisors!  

 

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