TRANSFER  PRICING

Transfer pricing is the part of the international taxation. Transfer Price is the actual price charged in a transaction between related entities which are part of the same Multi National Enterprises (MNE) group.

The tax rates vary from country to country. So, there is incentive for MNE group to set transfer prices for transactions between its group members such that tax liability for the group as a whole is minimized.

This involves setting transfer prices in such a way that less profits are booked in countries with higher tax rates. For example, a company which is a member of group manufactures products in a high tax country. The company would sell them at a low price/ profit to its affiliates/associates in tax haven countries at lower prices/ profits. These prices are lower than the prices that would have obtained had these enterprises been unrelated and dealt at "arm's length" and erode the tax revenues of the host country.

Thus, transfer pricing refers to tax avoidance practiced by MNE groups by setting transfer prices of intra group transactions such that these differ from the prices that would be obtained had the group members been unrelated entities dealing at arm's length.

​Following are the major type of transactions falls under transfer pricing:

• Sale of finished goods
• Purchase of raw materials
• Purchase of fixed assets, machinery and intangibles
• Reimbursement of expenses already paid or received
• IT enables and software development services
• Support services
• Technical, royalty, corporate guarantee & management service fees
• The receipt or payment of a loan