When used correctly, transfer pricing policies can help businesses in many ways. Read this post to know more about the transfer pricing laws in India and understand their benefits in detail.
In this age of globalization, Multinational Companies (MNCs) are on the rise. Businesses are expanding, often across multiple countries, to reach newer markets. The expansion is generally done by setting up separate entities or subsidiaries in different parts of the world.
The transfer pricing policy was introduced in India in 2001 under Section 92A-F to regulate the transfer of goods or services between such related parties. Here’s a quick overview of what transfer pricing is and how can businesses benefit through compliance-
What is Transfer Pricing?
Transfer pricing is the value attached to the goods or services transferred between related business entities. As India is a growing market, many foreign businesses have established their organizational units in India. The transfer pricing policy was introduced to regulate such inter-company transactions and avoid tax evasion.
The transfer pricing policies in India have regulated a few different pricing mechanisms that companies can use for determining the arm’s length price of related party transactions. The mechanisms are as follows-
- Comparable Uncontrolled Price (CUP)
- Resale Price Method
- Cost Plus Method
- Profit Split Method
- Transactional Net Margin Method (TNMM)
How Can Transfer Pricing Policies Help Businesses?
When used correctly, the transfer pricing policies can help streamline settlement between related entities and maximize tax savings. Here are some of the top benefits of transfer pricing in India-
Reduce Tax Liabilities
The pricing mechanisms prescribed under the transfer pricing laws can help reduce the tax liabilities of a company in countries with a higher tax rate. In such cases, companies overprice their goods or services and transfer them to a country with a lower tax rate to generate higher profits.
Lower Duty Costs
The transfer pricing policies also allow companies to ship their products to high tariff countries while still paying lower transfer prices. As a result, the base duty on such transactions can fall significantly. The reduced duty costs can help MNCs reduce the shipping costs and save more revenue.
Transfer pricing also helps encourage transparency on inter-company transactions. By complying with the transfer pricing regulations that have now been implemented in several countries, a company can operate unambiguously while also fulfilling financial and tax-related obligations.
India is well-known globally for its operational advantages, including skilled employees, reduced raw material costs, lower transaction costs, and affordable real estate. The transfer pricing policies assist foreign entities in establishing their presence in India and let the operational benefits accelerate their expansion and growth.
Third-Party Consultation to Comply with Transfer Pricing Regulations
While the transfer pricing policies can offer a host of benefits, the regulations come with a fair share of business risks. The laws also have stringent and time-consuming documentation requirements. To comply with global transfer pricing regulations, most multinational companies rely on the expertise of 3rd party consultants.
From choosing the right pricing mechanism, documentation, drafting inter-company contracts to aligning business operations with appropriate tax policies, reliable consultants can help MNCs in many ways. Companies can trust their expertise in the field to follow the best transfer pricing practices while minimizing risk exposure of improper reporting or non-compliance.