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Transfer price refers to the amount used in accounting for transfer of goods or services from one responsibility centre to another or from one company to another which belongs to the same group. y A transfer price is the price one subunit charges for a product or service supplied to another subunit of the same organization. y The price at which divisions of a company transact with each other
y
Transfer Price
TP means the value or price at which transactions take place amongst related parties. y Transactions may include the trade of supplies or labor between departments. y Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities. y Companies with dispersed production facilities, usually in different countries, use transfer pricing.
y
Fundamental decisions
Should the company produce the product inside the company or purchase from out side vendor ? This is sourcing decision. If produced inside at what price should the product be transferred between profit centers? This is transfer pricing decision.
T natios rasc n
In rnl te a
(W inth cutry ith e on )
Ete a x rnl
(ots eth cutry u id e on )
In rCmay te o pn
In Cmay tra o pn
In rCmpy te o an
In Cmay tra o pn
Cn lSs m otro yte Nn e te: o-Rla d Rla d e te c s cn s ot etre P fit/Didn/Rylty P fit/Didn/Rylty ro iv ed oa ro iv ed oa reeu cn s vne etre Fre F c a n o x lututios T nfe Pic g ras r r in p fit/Inetmncn ro v s et etre Acutin con g Fre/Ac utin o x con g
Cn lSs m otro yte s Fre F c a n o x lututios Acutin con g T nfeP in ras r ric g
Accounting Standard Income Tax Custom Duty Currency Fluctuations Risk of Expropriation
Uses of TP
1. Price setting for services performed by business unit. 2. A mean of evaluating financial performance of business unit. 3. Determining the contribution to net profit by profit centers in org. 4. Reduce in corporate taxes paid. 5. Reduce in VAT , excise, tariff
International OECD formulated Guidelines on transfer pricing. They serve as generally accepted practices by the tax authorities
y y y
India The Finance Act 2001 introduced the detailed TPR w.e.f. 1st April 2001 The Income Tax Act AS-18 Other Relevant Acts
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Information about transfer pricing method used; Other information that reveals the important circumstances of transfer pricing.
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Complications determining the arms length range and justifying the transfer prices.
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Accounting Standard 18
Requires disclosure of any elements of the related party transactions necessary for an understanding of the financial statements.
Related Parties
y y y
Control by ownership
50% of the voting right
Purchase and sale of goods; Rendering or receiving services; Agency arrangements; Leasing arrangements; Transfer of research and development; Licence aggrements; Finance Guarantees and collaterals; Management contracts.
Income/Expenses/Cost arising from an international transaction shall be computed having regard to arms
length price (ALP). y ALP provisions can be applied if it leads to decrease in taxable income or increase in losses.
The resale price method begins with the price at which a product is resold to an independent enterprise (IE)by an associate enterprise.
X sold to AE at Rs. 1000 (profit: 300) AE sold to an IE at Rs. 2000
x (profit of Rs. 500 for relevant IE)
In CP method, first the cost incurred is determined. An appropriate cost plus mark-up is then added to the cost to arrive at an appropriate profit. The resultant figure is the arms length price.
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Example
Kinetic Honda Motors
Collaborator: Honda Motor Co. Ltd Japan and their Subsidiary Honda Trading Corpn. Japan
Some Cases
Peico Electronics & Electricals Ltd.
Parent: Phillips Netherlands and its subsidiaries
Videocon Group
Collaborators: Toshiba Co., Mitsubishi Co