TRANSFER PRICING, DYNAMICS OF TRANSFER PRICING, TRANSFER PRICING AND INDIA, INDIRECT TRANSFERS, Asset Transfer vs Share Transfer

 TRANSFER PRICING (TP):

Transfer Price is the actual price realized in an economic transaction between 2 subsidiary entities (international as well as domestic) which are part of the same MNC group. 

DYNAMICS OF TRANSFER PRICING:

• The tax rates vary from country to country. eg .In India, average Capital gains tax is 30 % while in case of Mauritius Capital Gains Tax is nil.
• So, MNC’s execute Economic transactions in such a manner that total tax implication of the MNC is minimum.
• Transfer prices are set in such a manner that less profits are booked in countries with higher tax rates to avoid tax implications.

TRANSFER PRICING AND INDIA :

• The Finance Act, 2001 inserted various provisions in IT Act 1961 for  the first time with detailed Transfer Pricing regulations in India vis-a vis international transactions.
• The transfer pricing provisions were further extended to cover Domestic Transaction with effect from Financial Year 2012-13 .
• These Transfer Pricing regulations, are intended to prevent Revenue loss arising to a country from shifting of profits from high to low tax jurisdictions in case of International Transactions,
• In case of Specified Domestic Transactions, Transfer Pricing regulations prevent shifting of expenses or income between related enterprises / inter-unit enterproses merely to reduce the tax implications.
• Transfer Pricing regulations provided for Most Appropriate Method (‘MAM’) of the 6 methods specified in section 92C of the Act to calculate the Arm’s Length Price (‘ALP’) .
• With the passage of time, various disputes arose between the taxpayer and the Indian tax authorities over the issues such as the selection of most appropriate TP methodology .
• To avoid litigation, Advance Pricing Agreement (APA) regime was introduced in 2012, followed by Safe Harbour Rules in 2013.

INDIRECT TRANSFERS :

• Indirect transfers occur when foreign entities own assets in India  and the shares of the such foreign entities are owned by its subsidiary headquartered abroad.
• In Indirect Transfer, substantial shares holdings in India are transferred only rather than any transfer of actual assets.
• The Hutch-Voda CASE  was the classical example of indirect transfer.

Asset Transfer vs Share Transfer : 

• In an asset transfer, the buyer chooses the assets rather than purchasing all the assets and the process of such buying is referred to as “cherry picking”.
• In most of asset transfer cases, pre-existing liabilities of the business are not transferred as the buyer do not want to bear the liabilities.
• Liabilities will normally remain with the seller unless specifically transferred to the buyer .
• In a share transfer, ownership of the company transfers from the seller to the buyer, but the underlying business and assets remain owned by the company.
• The buyer cannot cherry pick the assets and liabilities.
• The buyer will acquire the shares in the company and will inherit all of the company’s assets and liabilities.