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.
