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Transcript of 28744579 International Taxation Transfer Pricingl
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International Taxation and
Transfer Pricing
Mayank KalsanSrishti Tulsyan
Naveen Pachisia
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Roadmap
Introduction
Initial concept
Types of taxes
Tax burden
Tax administration system
Foreign tax incentives
Taxation of Foreign Source Income & Double Taxation
Foreign Tax Credit
U.S Taxation of Foreign Source Income
Tax Treaties
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Continued
Tax Planning Dimensions
Subpart F Income
Offshore Holding Companies
Foreign Sales Corporations
International Transfer Pricing
Transfer Pricing Methodology
Determining arms length prices
Transfer Pricing In India
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Introduction
Decisions on where to invest, what form of business organization to employ, how
to finance, when and where to recognize elements of revenue and expenses, and
what transfer prices to charge are typical decisions strongly influenced by tax
considerations.
Management has little control over tax.
National tax systems are complex and diverse. The definition of the taxable
income, tax rates, incentives etc could be different International tax agreements, laws and regulations are constantly changing.
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Initial concept
The laws and regulations that governs the taxation of foreign corporations
and profit earned abroad rests on a few basic concepts.
Among these are the notions of Tax equity and tax neutrality
Tax equity- means that taxpayer who are similarly situated should besimilarly treated
Tax neutrality
1. Domestic neutrality- a foreign subsidiary is simply a domestic concern that
happens to be operating abroad2. Foreign neutrality-hold that, domestic affiliates abroad should be looked
upon as foreign companies that happens to be owned by domestic residents
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Types of taxes
A company operating abroad encounters variety of taxes
Direct taxes such as income taxes are clearly recognizable and
normally disclosed on most companies financial statements Indirect taxes such as consumption taxes are not so clearly
recognized or frequently disclosed
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Earning effects of direct vs.
indirect taxesdirect indirect
Revenues 250 250
Expenses 150 190Pretax income 100 60
Direct taxes(40 %) 40 -0-
After tax income 60 60
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Continued.
are those imposed by governments on dividends,interests and royalty payment to foreign investors. These taxes are
typically withheld at source by the paying corporation
this tax is typically levied at each stage of
production and distribution but only on the value added at thatparticular stage
value added tax are often the basis of border taxes. Like
import duties border taxes generally aims at keeping domestic
goods prices competitive with the imports
Taxes assed on imports is parallel to excise and other indirect
taxes paid by domestic producer of similar goods
this tax is imposed on transfer of items betweentax a ers. It is an indirect tax.
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Tax administration systems
National tax assessment systems also affects relative tax burdens.Several major systems are currently in use
- under classical system, corporate income taxes on taxable
income are levied at two levels, at corporate level and the shareholder
level
A corporation is taxed on income measured before the dividends are
paid and shareholders are than taxed on their dividends.
The dividend income paid to the shareholders is effectively taxed twice
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Corporate income 100
--Income tax at 33% 33
= net income 67
Dividend 67
--Personal income tax @ 30% 20.10
= net income 46.90
Total tax paid (33.0+20.10)= 53.10
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Continued
under integrated system , both corporateand shareholders taxes are integrated
Split rate system- A lower tax is levied on distributed income
than on retained earnings. While corporate income is stillsubject to double tax but the lower rate on distributed income
results in a lower tax burden than classical rate system.
Tax credit or Imputation System- in this system, a tax is leviedon corporate income, but part of the tax paid can be treated as
a credit against personal income taxes when dividends are
distributed to shareholders.
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Foreign tax incentives
Many countries offer tax incentives to attract foreigninvestments
Incentives includes tax free cash grants applied towards the
cost of fixed assets of new industrial undertakings or relief from
paying taxes for certain time periods
Temporary tax relief includes , reduced income tax rates, tax
deferrals and reduction of various indirect taxes
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Continued.
Some countries, particularly those with few natural resources,
offer permanent tax inducement
These so called tax havens includes the followings
The Bahamas, Bermuda and the Cayman islands which have
no tax at all
The British virgin islands which have very low taxes
Hong Kong , Liberia and Panama, which tax locally generated
incomes but exempt income from foreign sources
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Main characteristics of tax havens No or low taxes on all or certain types of income and capital.
: Many tax havens developed a dual currency control system, under
which residents are subjected to both local and foreign currency controls and non-residents,
only to the local currency controls. Companies set up in a tax haven are treated as non-
residents for exchange control purposes and their operations conducted outside the tax haven,
in foreign currency, are not subjected to exchange controls.
: In tax havens, the banking sector gives different treatment toresidents and non-residents, suppressing or smoothing controls and imposing lighter or no
taxation on the latter.
: Tax havens must be accessible physically and have facilities to deal with
information. Thus, it is necessary an infrastructure that provides good means of transportationand networks such as post, telephone, cable and satellite communication, which are especially
important to financial and banking activities in tax havens.
: political and economic stability, existence of a tax treaties and double tax
agreements, and availability of competent professional advisers, such as accountants and
lawyers
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Use of tax havens Residence principle : taxing the income of the residents
Source principle : capital income to be taxed by the country where
that income is generated and not by the country where the funds
for the invested capital originated, thus ignoring whether the
receiver of the incomes is a resident or not
But when countries different methods, the problem of doubletaxation arises. To tackle this, the countries must have double tax
agreements.
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Use of tax havens contd. Tax havens have been used for reducing tax liabilities purposes and are
particularly attractive for individual taxpayers from high-tax countries who
would be subject to high marginal tax rates on reported incomes in their
countries.
Earnings are channelled to tax havens where they are subject to zero or very
low tax rates and if the residence principle is fully applied, these earnings
might end up escaping taxation almost completely, leading the countrywhere the financial capital originated to lose tax revenue.
Hence, it is the combination of tax havens with the application of the
residence principle that brings about depressing effects on the world rate of
taxation on capital income
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TAX HAVENS AS A MEANS OF TAX
AVOIDANCEa) In countries with a relatively high level of
taxation, taxpayers may be tempted to avoid being subjected to domestic taxes by
moving their residence to a tax haven country.
b) : For tax purposes, the most important function of a base company
set up in a tax haven jurisdiction is to collect and shelter income from high
taxation in the taxpayers country of residence
The base company, be it a holding company, an investment company, a finance
company or a trade company, is an entity with its own legal personality and is
recognized as such in the country of residence, so that the income is no longer
subject to the normal taxation regime of his country of residence.
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Example: the company T, resident in country R, has developed
a new product. It is patented in favor of a base company in a
tax haven country which gives license do third parties incountry S. The income arising from the source country S can
be sheltered in the tax haven country or lent to company T
against the payment of interest which is deducted from Tstaxable profits.
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c) : Some companies are established with the only
objective of serving as a channel for the income. Such a company is
used by a taxpayer resident of one country to direct flows of income
originated in a third country, through a tax haven which has a suitable
network of bilateral tax conventions. The objective is to benefit from amore favorable tax treatment in the source countries made available by
the tax treaties.
As conduit companies are set up in countries benefiting from double
tax treaties, which levy no or little tax on receipts of foreign-source or
passive investment income, dividends and other payments they receive
pay low withholding taxes at source due to the treaty and are usually
transmitted to a base company in a low-tax country.
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Example:
A company Z is a parent company with wholly-owned subsidiary in the
source country S. The country of residence of Z has no treaty with
source country S. Z transfers its participation in C to a conduit
company in the tax haven country A. The dividends received are notsubject to a tax because of a participation exemptions or a system of
indirect credit existing in the tax haven country. Exemption from
withholding taxes in the source country S is claimed on the basis of the
treaty network of the tax haven country A. The dividends are reinvested
by Z in new subsidiaries.
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Mauritius is not a tax haven, but a low tax jurisdiction. The corporate tax rate for
domestic and non domestic activities is 15%. With tax incentives for certain
sectors, this is reduced to 3% for offshore companies, and to 0-5% for some ICT
activities
No withholding tax on payments made to shareholders and on loan interest paid
No capital gains tax
No minimum capital
Minimum number of shareholders: one
No need for shareholder(s) to be resident in Mauritius No exchange control
Effective regulation by the Financial Services Commission (FSC)
Strict anti-money laundering legislation
Source:INDIA OPPORTUNITY HSBC Bank (MAURITIUS) Ltd November 2007
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Year US$ billion
2004-2005 3.7
2005-2006 5.5
2006.2007 15.7
of last years total FDI inflows came from Mauritius.
Mauritius accounted for US$10 billion out of a total of US$ 25 billion in FDI inflows that
India has been able to attract in the last three years, starting 2004-2005.
In 2008, Mauritius and Singapore were the top source of FDI into India, while inflows
from Cyprus was more than that from Germany, Japan, Netherlands and France.
The total FDI from these three tax havens during 2007-08 was Rs 60,187 crore which was
around 61% of the total FDI inflows into India.
Source:INDIA OPPORTUNITY HSBC Bank (MAURITIUS) Ltd November 2007
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Taxation of Foreign Source
Income & Double Taxation
Exempt from taxation the income of resident corporations and citizens
generated outside their borders Foreign Tax Neutrality
Tax resident corporations and citizens on income earned within andoutside their borders
Domestic Neutrality
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Foreign Tax Credit
Due to Worldwide principle of taxation, foreign earnings of a
domestic company is subject to full tax levies of both home and
host country
Treat foreign taxes paid as a credit against the parents
domestic tax liability or as a deduction from taxable income.
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Taxdeduction
Tax Credit
Foreign Taxable Income $1000 $1000
Foreign tax paid $200 -
Taxable income ( U.S. purpose) $800 $1000
U.S. tax @ 35% $280 $350
Less foreign tax credit $200
Resultant U.S. tax $150
Total tax burden $480 $350
Effective Tax rate 48% 35%
Economic Effect of claiming Foreign Tax Credit
and Deduction
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U.S Taxation of Foreign
Source IncomeWithholding taxes on royalty and dividend payments = 15 % in
Countries A, C & D
Income tax rates = 30 % in Country B
Income tax rates = 40 % in Country C
Indirect sales tax = 40 % in Country D
Foreign Indirect Tax Credit =
Royalties Branch Subsidiary Subsidiary
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Royaltiesfrom A
Branchin B
Subsidiaryin C
Subsidiaryin D
Before tax earnings 100 100 60
Foreign Income Taxes 30 40 nil
After Tax earnings 70 60 60
Dividend Paid 30 30
Other foreign income 20
Foreign withholding taxes (15%) 3 0 4.5 4.5
U.S. Income 20 100 30 30
Dividend gross-up 20
Taxable Income 20 100 50 30
U.S. Tax (35%) 7 35 17.5 10.5
Foreign Tax Credit
Paid (3) (30) (4.5) (4.5)Deemed Paid (20)
Total (3) (30) (24.5) (4.5)
U.S tax (net) 4 5 (7) 6
Foreign Taxes 3 30 24.5 40
Total taxes of U.S Taxpayer 7 35 17.5 46
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Limits to Tax CreditMaximum tax liability will always be the higher of the host
country and home countrys tax rate
Limit on the amount of foreign taxes creditable in any year
Foreign Tax credit limit =
Foreign Source Taxable Income x U.S tax before credits
Worldwide taxable income
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Tax Treaties
Profits earned by a domestic enterprise in the host country shall
not be subject to its taxes unless the domestic entity maintains a
permanent establishment there.
Tax treaties affect withholding taxes on dividends, interest and
royalties paid by the enterprise of one country to foreign
shareholders
They usually grant reciprocal reduction in withholding taxes on
dividends, and exempt royalties and interest from withholding
entirely.
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International tax agreements have a number of objectives like elimination of double
taxation, the allocation of taxes between treaty partners, the encouragement of trade
and investment between the Contracting States, the prevention of international tax
avoidance and evasion.
With industrialised and developed countries, they cover all sources of income
arising out of inflow of technology industrial equipment and direct investment in
India, besides programmes for exchange of teachers, research workers, students and
artists as also provisions relating to avoidance of taxes.
With the communist bloc countries which do not have a tax system similar to that
of European and capitalist countries the agreements cover only international
maritime and air traffic; and
With the developing countries the agreements are structured to encourage the flow
of technology, equipment and professional services which India is capable to
transfer and offer.
Double tax agreements help to create an environment of fiscal certainty which
encourages trade and investments between countries.
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Armenia
Australia
Bangladesh
Brazil
Canada
China
Cyprus
Turkey
UAE USA
Uzbekistan
Vietnam
Zambia
Afghanistan
Bulgaria
Czechoslovakia Ethiopia
Saudi Arabia
Switzerland
UAE
Yemen
Arab Republic
African NationalCongress Mission
Income-tax(Double TaxationRelief) (Aden)Rules, 1953
Income-tax
(Double TaxationRelief)(Dominions)Rules, 1956
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Treaties withholding Tax rates in United States
Country
Australia
Dividends
15
Interest
10
Royalty
5
Austria 15 10 10
Barbados 15 5 5
Belgium 15 15 0
Canada 15 10 0
Cyprus 15 10 0
Czech Republic 15 0 10
Denmark 15 0 0
Egypt 15 15 0
Estonia 15 10 5
Finland 15 0 5
France 15 0 5
Germany 15 0 0
Greece 30 0 0
Hungary 15 0 0
Iceland 15 0 0
India 20 15 10
Source:IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (January 2006).
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Treaties withholding Tax rates in India
Country Dividends Interest RoyaltyAustralia 15% 15% 15%
Canada 25% 15% 15%
China 10% 10% 10%
Germany 10% 10% 10%
Malaysia 20% 20% 30%
New Zealand 15% 10% 10%
Singapore 15% 15% 15%USA 20% 15% 10%
Non treaty countries Nil 20% 10%
Source: Income Tax Department, 2007
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Tax Planning DimensionsMultinationals have a distinct advantage over purely domestic
companies because they have more geographical flexibility in
locating their production & distribution systems
Two caveats
Tax considerations should never replace business strategy
Constant changes is tax laws constrain the benefits of long term
tax planning
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Organisational ConsiderationsBranch
Income consolidated with that of the
parent company
Fully taxed in the year earned
whether remitted or not
If initial operations are forecast to
generate losses - advantageous
Subsidiary
Option not available for a subsidiary
Earnings not taxed until remitted
When turn profitable - advantageous
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Subpart F Income The U.S taxes shareholders of controlled foreign corporations (CFC) on
certain undistributed income of that corporation
A CFC is a corporation in which more than 50 % of the combinedvoting power or fair market value is owned directly or indirectly by a
A U.S. shareholder is a U.S. person who owns directly, indirectly,
10% or more of foreign corporation, such as U.S. corporations, citizens
and residents of U.S.
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Subpart F IncomeSubpart F income comprises various types of income such as:
Passive investment income
Net gains on foreign exchange or commodities
Gains from the sale of investment property
Income from shipping operations in foreign commerce
Income from transporting or distributing oil or gas.
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Offshore Holding CompaniesA holding company is a company of which the business activity
is holding shares in other companies.
A parent company incorporated in a high tax country may
form a subsidiary company in a low tax or tax free offshore
area
This can give rise to opportunities for deferring tax and for
more effective cash management.
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Foreign Sales CorporationsForeign-Sales Corporations (FSC) is a foreign corporation
created by a "parent" shareholder (usually a corporation)
It exempts a portion of income derived from the export of U.S.
products from U.S. income taxation.
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Introduction
A multinational enterprise has facilities of many types located
in many locations in the world
The profits of each portion of business are structured throughintercompany transactions like sales, licensing, leasing etc.
Transfer pricing is a field of analysis that reflects the price of
goods, services or intangible transfers between entities.
The regulations require related parties to deal with each other
at arms length i.e. as they would with unrelated parties.
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International Transfer Pricing
About 40% of all international trade consist of transfer between
related business entities
Cross country transactions expose MNC to many environmental
factors that both create and negate the options for increasingprofits
Some factors are:
Taxes
Tariffs Competition
Inflation risks
Performance evaluation considerations
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Corporate profits can be increased by setting transfer pricesso as to move profits from subsidiaries in high tax countries
towards subsidiaries in low tax countries
Eg:
A and B are wholly owned subsidiaries of Global Enterprise in UK
and USA.
A sells its product(500,000) to B at $6 per piece
B sells in market at $12 per piece
Tax rate in UK16.5% and in USA is 35%
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A(UK) B(USA) Globalenterprise
Sales $3000,000 $6000,000 $6000,000
Cost of sale $2100,000 $3000,000 $2100,000
Gross margin $900,000 $3000,000 $3900,000
Operating Exp. $500,000 $1500,000 $2000,000
Pre tax income $400,000 $1500,000 $1900,000
Income tax $66,000 $525,000 $591,000
Net income $334,000 $975,000 $1309,000
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A(UK) B(USA) Globalenterprise
Sales $4250,000 $6000,000 $6000,000
Cost of sale $2100,000 $4250,000 $2100,000
Gross margin $2150,000 $1750,000 $3900,000
Operating Exp. $500,000 $1500,000 $2000,000
Pre tax income $1650,000 $2500,000 $1900,000
Income tax $272,200 $87,500 $359,750
Net income $1377,750 $162,500 $1540,250
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Tariffs on import goods also affect the transfer
pricing policies.
Company exporting goods to a subsidiary domiciled
in a high tariff country could reduce the tariff
assessment by lowering the prices of merchandise
sent there.
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To facilitate the establishment of a subsidiary abroad, parent
company could supply the subsidiary with inputs invoiced at low
prices
Excess profits earned in one country could subsidize the penetrationof another market
To improve the foreign subsidiaries access to local capital markets
This may call forth anti-trust actions by host government or
retaliatory actions by host government.
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The risk of high inflation in a country may call for high transfer prices
on goods provided to a subsidiary facing high inflation.
It will remove as much cash from subsidiary as possible and avoid
eroding the purchasing power of firms cash
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Transfer prices are a major determinant of corporate
performance
It is difficult for decentralized firms to set transfer price that
both
(a) motivate managers to make decisions that maximize their
units well being and are congruent with companys goal
(b) provide an equitable basis for judging the performance ofmanagers and units of the firm.
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Arms Length Price
Section 482 of Internal Revenue Code, USA, requires that
pricing of intra company transfers be based on arms length
pricing
It is the price that an unrelated party would receive for the
same or similar goods under identical or similar situations
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Transfer Pricing Methodology
Market based transfer prices
Cost based transfer prices
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Market Based Transfer PricingThe subsidiary supplies the products at the market price of
that product
Efficient use of the firms scarce resources
Use is consistent with decentralized profit centre orientation
Consistent with arms length method
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Often there is no intermediate market for products or
servicesIf there is a market, still it would not be perfectly
competitive or internationally comparable.
Does not allow a firm to adjust prices for competitive
purposes
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Cost based systemsIn this system the subsidiary sell its products to the parent
or other subsidiary at its cost
Advantages
Simple to use
Based on readily available data
Easy to justify before tax authorities
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Provide little incentive for sellers to control their price
Production inefficiencies may simply be passed on to buyers
as inflated prices
The problem of cost determination is compounded
internationally, as every country has different cost
accounting concepts
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If any person who is resident in India in any previous year proves that
in respect of his income which accrued or arose to him during thatprevious year in Pakistan he has paid in that country, by deduction or
otherwise, tax payable to the Government under any law for the time
being in force in that country relating to taxation of agricultural
income, he shall be entitled to a deduction from the Indian income-tax
payable by him - (a) Of the amount of the tax paid in Pakistan under
any law aforesaid on such income which is liable to tax under this Act
also; or
(b) Of a sum calculated on that income at the Indian rate of
tax; whichever is less.
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Transfer Pricing In India
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Transfer Pricing Regulations
The Finance Act 2001 introduced the detailed TPRw.e.f. 1st April 2001
The Income Tax Act
AS-18
Other Relevant Acts
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Related Parties Requires disclosure of any elements of the related
partytransactions necessary for an understanding ofthe financial statements.
Control by ownership
50% of the voting right
Control over composition of board of directors
Power to appoint or remove the directors Control of substantial interest
20% or more interest in the voting power
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Income Tax Act and TP Finance Act 2001 substituted the old section of 92 of
the ITA by sections 92,92A to 92 F.
These sections are the backbone of Indian TPR.
These sections define the meaning of related parties,international transactions, pricing methodologies etc.
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Associate Enterprise: 92A Direct Control/Control through intermediary
Holding 26% of voting power
Advance of not less than 51% of the total assets ofborrowing company.
Guarantees not less than 10% on behalf of borrower
Appointment of more than 50% of the BoD
Dependence for 90% or more of the total raw material orother consumables
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Methods for determining arms length
prices Sec 92OECD ( Organisation for economic cooperation and
development ) identifies several broad methods:
Comparable uncontrolled pricing method (CUP)
Resale pricing method (RPM)
Cost plus pricing method (CPM)
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Comparable uncontrolled pricing
methodTransfer prices are set by reference to prices used in
comparable transactions between independent companies or
between the corporation and an unrelated third party
Differences in quality, trademark, brand names makes the
direct comparisons difficult
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Resale pricing method
The price at which the item can be sold to an independent
customer is takenAppropriate mark up associated with expense,
And normal profit margin is deducted from the price to
derive the intra company transfer price
The problem with this method is deciding the appropriate
mark up
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Cost plus pricing methodA markup is added to transferring affiliates costs in local currency
The markup includes:
Financing costs related to export inventory, receivables, assets employed
A percentage of cost covering manufacturing, distribution, warehousing
and other related costs to export operations
Adjustments are made to reflect the government subsidy, if any
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Other Pricing MethodsComparable profits method
Comparable uncontrolled transaction method
Profit split method (PSM)
Transactional Net Margin Method (TNMM)
Powers of Assessing Officer
Consequences of recomputation of income
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Comparable uncontrolled transaction method
Applicable to intangible assets
Identifies a benchmark royalty rate referencing transactions
in which same or similar intangibles are transferred
This method relies on market comparables
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Profit split method
The operations of two or more parties are highly integrated, making
it difficult to evaluate their transactions on an individual basis
The first step is to determine the total profit earned by the parties
from a controlled transaction
The second step is to split the profit between the parties based on the
relative value of their contribution considering the functions
performed, the assets used, and the risks assumed by each
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Transactional Net Margin Method
The net profit realised by the enterprise from an international transaction entered with an
associated enterprise is computed in relation to costs incurred or sales effected or assets
employed or to be employed by the enterprise or having regard to any other relevant base
The profit margin realised by the enterprise or by an unrelated enterprise from a comparable
transaction or a number of such transactions is computed having regard to the same base
The net profit margin referred to as above arising in comparable uncontrolled transactions is
adjusted to take into account the differences, if any, between the international transactions and
the comparable uncontrolled transactions which could materially affect the amount of net profit
margin in the open market.
The net profit margin thus established is then taken into account to arrive at an arms length
price in relation to the international transaction.
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Choice of Most Appropriate Method
Even though it is not possible to standardize the selection of Most AppropriateMethod, the following can be stated as suggestive guidelines
Comparable uncontrolled price method is relevant in case of transactions of
loans, royalties services, transfer of tangibles
Resale price method is relevant in case of marketing operations of finished goods
Cost plus method is used where raw materials or semi-finished products are
sold.
Profit spilt method is required when transactions involved provisions ofintegrated services of more than one enterprise
TNMM is used in most of the cases including transfer of semi-finished goods,
distribution of products where RPM appears to be inappropriate .
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International Transactions: 92B
Transaction between two or more AE of which either both or anyone isa non-resident.
Transactions:
Purchase/Sale/Lease
Provision of service
Lending or borrowing
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Some Transactions subject to ALP
Purchase at little or no cost.
Payment for services never rendered.
Sales below MP/ Purchase above MP
Interest free borrowings
Exchanging property
Selling of real estate at a price different from MP
Use of trade names or patents at exorbitant rates even after their
expiry.
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Framing Of Transfer Pricing Rules
Transfer pricing rules were introduced by the Government about five
years back to check likely losses in revenue while estimating the
value of transactions in goods and services between an entity in India
and a related party abroad.
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Indian Transfer Pricing Regulations Intra-group cross-border sale, purchase, lease or cost sharing transactions
involving intangible property are inter-alia covered by the new Transfer
Pricing code.
Methods prescribed (by section 92C) for the determination of the Arms
Length Price (ALP) of a transaction may not be adequate for valuation of
intangibles.
It may be necessary to apply other internationally applied valuation methods
for the valuation of intangible assets.
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Indian Transfer Pricing Regulations
(Contd) Use of such Other methods is permissible under laws of other countries
like US, UK, etc, and is also allowed by the OECD Guidelines.
OECD Guidelines recognize that the general ALP and methods can be
difficult to apply to transactions involving IP.
Indian rules also need to recognize these internationally applied valuationmethods/approaches and adopt a consensual approach for dealing with such
transactions.
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Transfer Pricing Penalties
In order to ensure compliance with the arm's length principle, the I-T Act has prescribed stiff penalties
Transfer Pricing "adjustments" in India are now treated as
concealment of income, deserving harsh penalties of up to 300 percent.
The Indian TP regulations are broadly based on OECD guidelines.
These guidelines are internationally applied by various countries for
resolving TP issues.
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Burden of ProofThe burden to establish that an international transaction
is carried out at arms length price is on the tax payer
who is to disclose all the relevant information and
documents relating to prices charged and profit earned
with related and unrelated customers.
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Double Taxation ReliefA DTAA is an agreement entered between two countries
in order to avoid taxing the same income twice.
The double taxation is of two kinds:-
: a person is taxed on the same
income in different contracting states.
: the same income is taxed in
the hands of different persons in different countries
Thus in order to avoid the burden of being taxed twice,the
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Thus in order to avoid the burden of being taxed twice,the
country may frame laws to grant relief.
Double taxation relief is of 2 types :-
Unilateral Relief
Bilateral relief
In case of unilateral relief, the country of which the tax payer is
resident provides relief to the tax payer through its domestic tax
laws irrespective of the country from which the tax payer earned
his incomeSec 91
In case of bilateral relief , the two countries negotiate the double
taxation relief provisions as part of DTAA.
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Sec 90Agreement with Foreign
countries The CG may enter into an agreement with any foreign government for grantingrelief in respect of
(a) Income on which tax has been paid both under the IT Act and income tax in that
foreign country.(b)For the avoidance of double taxation of income under this Act and under the
corresponding law in force in that country, or
(c) For exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that
country, or investigation of cases of such evasion or avoidance,(d) For recovery of income-tax under this Act and under the corresponding law in
force in that country, and may, by notification in the Official Gazette, make suchprovisions as may be necessary for implementing the agreement.
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(2)Where the Central Government has entered into an
agreement with the Government of any country outside
India under sub-section (1) for granting relief of tax, oras the case may be, avoidance of double taxation, then,
in relation to the assessee to whom such agreement
applies, the provisions of this Act shall apply to the
extent they are more beneficial to that assessee.
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Sec 91- Relief when there is no DTAA
1.If any person who is resident in India in any previous year proves
that, in respect of his income which accrued or arose during that
previous year outside India (and which is not deemed to accrue or
arise in India), he has paid in any country with which there is noagreement under section 90 for the relief or avoidance of double
taxation, income-tax, by deduction or otherwise, under the law in
force in that country, he shall be entitled to the deduction from the
Indian income-tax payable by him of a sum calculated on suchdoubly taxed income at the Indian rate of tax or the rate of tax of
the said country, whichever is the lower, or at the Indian rate of
tax if both the rates are equal.
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Some Cases Peico Electronics & Electricals Ltd. Parent: Phillips Netherlands and its subsidiaries
Asea Brown Boveri
Parent: ABB Switzerland and its subsidiaries
Videocon Group
Collaborators: Toshiba Co., Mitsubishi Co
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Thank You!