Transfer pricing is one thing to think about when you do business internationally. This key accounting practice is important to understand because it affects many things, from day-to-day tasks to things like sales and research, which are more important.
If you do business with other countries or are thinking about doing so, you need to know what transfer pricing in India is and how it can affect your business.
What is Transfer Pricing in India?
Transfer pricing is a type of accounting that shows how much one part of a company charges another part for goods and services.
Price agreements for the transfer of goods and services between a parent firm and its subsidiaries, affiliates or other controlled entities can be established using transfer pricing. Transfer pricing can help companies save money on taxes, but the tax authorities may not believe them.
How Transfer Pricing is Effective
Transfer Pricing in India is a form of accounting and taxation that lets transactions within a business and between subsidiaries that are under the same ownership or control be priced. Transfer pricing is a method that is used for both domestic and international transactions.
A transfer price determines how much it will cost to pay for services from another division, subsidiary, or holding company. Usually, transfer prices are the same as the price of the goods or services on the market. Transfer pricing can also be used for research, patents, and royalties, all types of intellectual property.
Multinational corporations (MNCs) are allowed by law to use the transfer pricing method to determine how much money each subsidiary and affiliate company should get. Companies can sometimes use (or abuse) this practice to change their taxable income and pay less in taxes overall. With the transfer pricing mechanism, businesses can shift their tax liabilities to jurisdictions with more favourable tax rates.
Purpose
Even though transfer pricing has more than one goal, here are two of the most important ones:
• Transfer pricing lets businesses make money from each of their divisions. Not only that, it also allows them to look at how each plant is doing.
• Transfer pricing helps business entities figure out how to divide up the company’s resources by using the cost of one centre to measure the resource the centre has used.
A single corporation can have several branches, which are separate legal entities. The parent corporation can own all or most of the branches. In many places, a business is under the same control if it has members of the same family on its board of directors.
Transfer pricing is a key part of how a multinational company determines how to divide its profits and pay its taxes in the different countries where it does business. It lets the other parts of a business set their prices. Transfer pricing can help multinational companies save money on taxes, but regulators often use it to help companies avoid taxes.
Through transfer pricing, companies can also make sure they make money on goods and services in countries with lower tax rates. International tax laws are set by the Organization for Economic Cooperation and Development (OECD).
In international exchanges of goods and services, when goods and services are sent from one country to another through a company connected to both countries, the company can avoid tariffs on the exchange.
Transfer pricing principles are used to figure out the “Arm’s-length price” for a transaction that took place between related businesses so that any tax liability can be reduced or avoided. Under transfer pricing, there are different ways to determine the “Arm’s Length price” when a deal is made between two independent parties.
Why Transfer Pricing is Good?
Transfer pricing in India makes it possible to get better prices, work more efficiently, and keep the accounting process simple. Creating processes and methods easier to understand cuts down on human costs, increases profits, and puts the focus on business operations strategy. Some good things about transfer pricing are:
• Lower Taxes and Tariffs: This means duties are reduced by sending goods to high-tariff countries at low transfer prices. When shipping goods to places with a high tariff, companies can use a low transfer price to reduce the transaction’s duty base.
• Competitiveness on the International Market: When prices go up, income taxes in countries with high taxes go down, and profits move to countries with low taxes. Transfer pricing lets businesses raise the prices of goods they sell in places with higher taxes to make up for the difference in profits.
• Minimising the Risk of the Exchange Rate: If dividend repatriation isn’t allowed, the government can make it possible by raising the price of goods sent back home.
Conclusion
Transfer pricing has caused international tax problems for many businesses, no matter how big or small. Transfer pricing is a way to cut costs and ensure your business is following all global rules simultaneously. For transparency in an organization, it is important to review your transfer pricing strategy and documentation, together with the risks and benefits.