Introduction
Transfer Pricing is a process where goods and services of a related company are exchanged with other companies under the same control. Transfer Pricing is the most important tool in corporate accounting. For instance, if the subsidiary company gives some goods and services to the holding company at a price, then this process is known as transfer pricing. The transfer price generally does not differ from the market price of goods and services, but in any case, if it differs, one company is in an advantageous position whereas the other company suffers some loss due to the transfer price. This article provides a general overview of the concept of transfer pricing, its relevance, and how this process works.
The principle of arm’s length
Transfer pricing is used by many companies for tax evasion. Governments and statutory authorities implement the concept of the arms length principle. Price is the main concern of statutory authorities. This principle states that the transaction between the companies under the same head or control should be treated as if it were a transaction between two unrelated companies. It essentially means that there should be no difference between the market price of goods and services offered to related companies. The arms length principle is also helpful for companies to avoid double taxation.
The operation of transfer pricing
Transfer pricing is done between the two companies that are under the same control and ownership. For instance, in the process of transfer pricing, if A and B are two companies owned by ABC, both A and B are under the same owner, i.e., ABC, but practically these are two separate companies. Now, say, A works in India, where corporate tax is 25%, whereas B works in America, where corporate tax is 20%. As a result, ABC attempted to persuade A to sell its goods and services to B in order to reduce the tax burden because there would be less revenue. It should be noted that ABC has no effect at all on the profit and loss of the individual companies. So this transfer price leads to the avoidance of tax. The government and regulatory authorities had instructed us to keep the transfer price at the market rate only. For more information visit http://tpa-global.comThe transfer price should be mentioned separately in the financial statements and scrutinised by the company’s auditors.
Types of Transfer Pricing
There are mainly five major methods of transfer pricing. These are Comparable Uncontrolled Price, Resale Minus Price, Cost Plus, Profit Split, and Transactional Net Margin. All these five methods have different principles and accountability.
The Importance of Transfer Pricing
Transfer pricing helps in the allocation of profit between the subsidiary and parent company. Transfer pricing is majorly beneficial to the international tax market. It does not have an effect on the companies’ having the same nationality. It creates a problem when the price varies from the market price of the goods and services.
Conclusion
Transfer pricing is the method of allocating profit between the parent organisation and subsidiary companies. It is the method of transferring goods and services from one company to another under the same owner. It should be kept in mind that the price decided to transfer should be in consonance with the arms length principle.
