Taxation / Taxation / Transfer Pricing and APA..
- Transfer Pricing:
- Transfer pricing involves determining the prices at which transactions occur between entities within the same corporate group, especially when those entities are located in different countries.
- The prices set for goods, services, or intellectual property exchanged between related entities impact the allocation of profits among these entities.
- Need for Transfer Pricing Code:
- The rise of profit-shifting practices by multinational corporations (MNCs) necessitated the introduction of Transfer Pricing Codes.
- MNCs often manipulate transfer prices to shift profits to jurisdictions with lower corporate tax rates, impacting the tax revenues of countries with higher tax rates.
- Objective of Transfer Pricing Norms:
- Rationalize transfer pricing norms to prevent erosion of tax revenues.
- Check tax evasion and money laundering associated with transfer pricing practices.
- Arm's Length Price:
- The Indian Transfer Pricing Code mandates that income arising from international or specified domestic transactions between associated enterprises should be computed based on the arm's length price.
- Arm's length price refers to the price that would prevail in an open market transaction, ensuring fairness and preventing base erosion.
- Advance Pricing Agreements (APA):
- APA is an agreement between a taxpayer and tax authorities regarding the pricing of existing or proposed transactions between related parties.
- It provides a platform for negotiation and consensus on transaction pricing, promoting transparency and avoiding disputes.
- Key Features of APA:
- Interaction and Negotiation: APA facilitates interaction and negotiation between taxpayers and revenue authorities.
- Duration: If an agreement is reached, it is valid for a specified period, often five years.
- Avoiding Disputes: APA helps avoid disputes with tax authorities over transfer pricing by defining agreed-upon pricing methods and setting transaction prices in advance.
- APA Scheme in India:
- Introduced in 2012, the APA scheme in India applies to both foreign MNCs and Indian companies.
- It aims to provide certainty to taxpayers in transfer pricing matters and outlines methods for pricing and setting prices for international transactions.
The adoption of Transfer Pricing Codes and the implementation of APA schemes contribute to fairer and more transparent international transactions, discouraging profit-shifting practices and ensuring that tax revenues are appropriately allocated among jurisdictions.
