Practical Strategies to Minimise Transfer Pricing Risk

Transfer pricing is about setting prices for goods and services sold between parts of the same company but in different countries. For example, a company's office in one country might sell something to its office in another.
 

The price they choose for this sale is important for taxes. If the price is too low or too high, a country’s tax office might think the company is trying to avoid paying taxes. This is a big risk for businesses that serve globally. To avoid problems, companies need to manage these risks well.
 

The strategies below are practical ways to do this.
 

Develop a Comprehensive Transfer Pricing Policy
 

A well-documented transfer pricing policy is a cornerstone of risk management. This policy should clearly define the company's approach. It should outline the methods used to determine prices. It should be done in reference to Indian Income Tax Act, 1961, particularly Sections 92A to 92F, and the associated Transfer Pricing Rules (Rules 10A to 10F).

 

It must outline the chosen method for each transaction type. For example, if the company is an Indian subsidiary providing IT services to its US parent, the policy should specify the use of the Cost Plus Method and detail the calculation of the mark-up. A robust policy provides a defensible position to the Central Board of Direct Taxes (CBDT). You should look at this plan often and update it to reflect any changes in Indian tax laws. This helps ensure you are always following the rules.

 

Check Your Prices Against the Market Next, you must check your prices to make sure they are fair, a process known as benchmarking. For Indian compliance, this means comparing your prices to what other, unrelated Indian companies would charge. The Indian tax authorities are very particular about the use of Indian comparable data. Relying solely on foreign or global databases may be challenged during an audit.

 

Several methods are available for benchmarking as per Indian rules. These include the Comparable Uncontrolled Price method. The Resale Price Method is another option. The Cost Plus Method can also be used. Each method requires specific data. A detailed analysis supports the chosen method. It provides a strong defence against challenges.

 

Keep Meticulous Transfer Pricing Documentation It's crucial to write down everything about your pricing decisions. This documentation proves that transfer prices are justified. It should detail the business rationale for the transactions. It must also describe the functions performed. This includes the preparation of both a Master File and a Local File, as mandated by Section 92D of the Income Tax Act.

 

The documentation package should detail the business rationale for the transactions, the functions performed by the Indian entity (including its role as a "low-risk" or "full-fledged" service provider), assets used, and risks assumed. The local file must contain specific details about the Indian related party transactions, the detailed benchmarking analysis, and all relevant agreements.

 

All in all, managing transfer pricing risks is very important for a company's financial health. Following these steps mentioned above can help a lot. If you are in Singapore, Japan, USA, Australia, UK or any other part of the globe and want to start a business in India, these steps are essential. They help you follow the tax rules in India and other countries. Taking care of transfer pricing now will help your business grow smoothly in the global market.

 

Company Bio --- Starting a Business in India can be difficult because of all the rules. Prakash K Prakash Consult helps global business owners with this. Their services are for people and companies who want to start a business in India. They help clients from countries across the globe understand and follow all of India’s financial and tax rules.