How Does an Indian Company Incorporate Transfer Pricing?

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How Does an Indian Company Incorporate Transfer Pricing?

Every company wants to expand its market share. Companies establish new branches and subsidiaries in different locations for the same rationale. Amids

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Every company wants to expand its market share. Companies establish new branches and subsidiaries in different locations for the same rationale. Amidst the rise of globalization, companies are exploring opportunities in new jurisdictions/countries. The number of intercompany transactions has suddenly increased due to globalization and expansion. Regulatory authorities know that companies might offer undue advantages to their sub-companies. To prevent illegitimate intercompany transactions, regulatory authorities have established transfer pricing rules. Transfer pricing rules in India are strict and mandatory for all intercompany transactions. Companies often struggle with transfer pricing in India and look for external support. Continue reading to understand how an Indian company should incorporate transfer pricing.

What do companies need to know about transfer pricing?

Transfer pricing is always related to intercompany transactions. When a company has many subsidiaries/branches, transactions will occur between them. In such a transaction, both parties will be under the same ownership. The owner might consider transferring goods/services at a low price to its subsidiary. By doing so, they might save on taxes and procure goods/services at a lower cost. However, the owner cannot do so because of transfer pricing rules. Other companies which do not have subsidiaries in different countries might not compete with the business offering undue advantages to related parties.

Transfer pricing is the right price for an intercompany transaction without any undue advantage. The law states that transactions between related entities should appear exactly like any other transaction. Related parties should provide goods and services at the same rate they offer to other companies. In the past few years, many Indian companies have gone global. They have successfully opened branches in foreign firms and indulge in intercompany transactions. Such companies need the services of skilled individuals to decide the correct transfer price. The same applies to foreign firms having subsidiaries/branches in India. Ignoring transfer pricing in India might be counted as fraud.

Transfer pricing rules for Indian companies

As discussed above, every business with multiple branches/subsidiaries should be familiar with transfer pricing. The basic transfer pricing rule in India is that companies cannot provide undue advantages to related parties during a transaction/deal. Therefore, every company has to determine the ALP (Arm’s Length Price) to execute intercompany transfers. ALP is the price of the transaction considering both parties are unrelated. When determining the ALP, the transaction environment should be uncontrolled. Several traditional methods are used by companies to calculate the ALP.

Companies rely on financial data to determine the correct transfer price. However, companies cannot use old fiscal data to determine the transfer price. This is because prices of goods and services change drastically, and companies cannot rely on old fiscal data. The law says that the fiscal data used to determine the transfer price should not be over two years old. Under any circumstance, tax evasion should not be the goal of an intercompany transaction/deal. These transfer pricing rules are applied to every company in India, regardless of size. These rules also apply to foreign firms having subsidiaries in India. Companies ignoring the transfer pricing rules in India might be booked for tax evasion. These rules help keep the Indian economy healthy and offer equal opportunities to all companies.

How to ensure the correct transfer price for intercompany transactions?

Now that you know everything about the transfer pricing rules, it is time to understand the right strategy. Not everyone can determine the correct transfer price for intercompany deals. Usually, companies rely on internal employees to set the right transfer price. Internal employees might not be familiar with the ALP calculation methods. It is why they commit a mistake, and the company’s reputation is in danger. Indian companies need transfer pricing experts to make the right decisions for intercompany transactions. To incorporate transfer pricing in India, companies need support from external firms.

Many companies in India rely on CA firms for transfer pricing services. CA firms have a ready-made team of transfer pricing experts, aware of all the laws. By outsourcing transfer pricing processes, a company will successfully slash internal costs. CA professionals will determine the correct ALP and prevent a company from legal hassles. Also, internal employees can focus on other business tasks to boost revenue. Seek external support for transfer pricing in India now!

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