Just understand it like this, when two related companies, in different tax jurisdictions, make overpriced/underpriced transactions with each other to save on the overall tax, that is called transfer pricing. Transfer price is arbitrary and has nothing to do with cost, added value, market forces. The effect of transfer pricing is that business entities make less taxable income or excessive loss on transactions which reduces their tax liability.
There are a lot of completely legitimate, permissible transfer pricing methods using which a business can save on excessive taxes and ensure stable cash flow, liquidity and proper resource allocation amongst all its subsidiaries. If a business can set its transfer pricing game right, growth prospects get almost double!
Transactions Governed by Transfer Pricing Laws
Below mentioned are some typical cross-border transactions that are governed by the provisions of transfer pricing:
- Finished goods sales;
- Raw material purchase;
- Fixed assets purchase;
- Machinery sale or purchase;
- Intangibles assets sale or purchase.
- Reimbursing expenses paid or received;
- IT-enabled services;
- Ancillary support services;
- Development of software services;
- Fees on technical services;
- Fees on management services;
- Fees on royalty;
- Corporate Guarantee fees;
- Receiving or paying off credit.
Transfer Pricing Benefits
For management accounting and reporting purposes, MNCs have the freedom to a certain extent to decide how they will allocate the profits and the expenses to the subsidiaries present in various countries. These subsidiaries might be divided into various segments or might just be a standalone business. In such cases, transfer pricing helps in allocating revenue and expenses to its nationwide/international counterparts in an efficient manner.
One of the critical factors for the profitability of such Subsidiaries’ are the prices on which the inter-company transactions take place. Nowadays, inter-company transactions are heavily scrutinised by government authorities. Also, transfer pricing could impact shareholders’ wealth as it has a direct nexus with an organisation’s taxable income and its post-tax, free cash flow.
It is critical for businesses with international inter-company transactions to manage transfer pricing in an impeccable manner, especially when it comes to legal compliances and in order to avoid the obnoxious consequences of non-compliance like penalties and scrutiny.
We are known for optimal coordination with the organization’s management for all the decisions pertaining to transfer pricing and making things effortless. We design an accounting system that commensurates with the transfer pricing rules and resolve the issues regarding international transfer pricing like butter. We offer all the CFO services, thus we are capable of taking care of everything in your business which is finance from bookkeeping to tax filings.
To know how can we add value and implement our innovative solutions in your business, give us a ring at 7727887799 (also available on WhatsApp) or drop us an email at email@example.com with all your queries and our team will reach out to you within 2 hours.
We take care of Transfer Pricing compliances, along with providing a range of other services to take full accountability as the virtual CFO to your business.
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