Transfer pricing is a term that is often heard in the world of trade and commerce. If you are looking to start a business, it is important that you know about the meaning of this term when you do so. Basically, the term transfer pricing indicates the monetary value that is attached to the transfer of services or goods between two trading parties. Therefore, the concept of transfer pricing denotes the price that is paid for the goods that are transferred from one specific economic unit to the other, considering that these two units are located in two different countries and yet belong to same global firm.
A transfer price is therefore the amount of money that is charged for a specific transaction. In cases of foreign transactions, the transfer price is the concrete price that is charged between allied enterprises. Issues related to transfer pricing may arise when the different worldwide commercial establishments that are based in distinct jurisdictions decide to transfer services or property to one another. Such entities hardly carry out their dealings at arm's length, which is why the dealings between those entities might not be governed by ordinary market forces. In cases where the amount of transfer price is different from that of the amount that would have been rightly charged in case the enterprises were not related, such a difference leads to a tax advantage. In such cases, the tax amount gets calculated based on arm's length price.
Transfer price works as the value that is attached to the transfer of services, goods and technology between two related entities. In this sense, they are often attributed to parent company and its subsidiary corporations. They can also involve parties that are regulated by some common entity. The essence of transfer pricing is that it is not decided by some independent transfer and transfer or as is often the case with transactions that are carried out at an arm's length. The transaction between these two parties is also not governed by the open market considerations. The very nature of transfer pricing leads to a shift of profit. In other words, the profit that is rightly attributable to a specific jurisdiction is then shifted to the other jurisdiction. Its main purpose is to steer clear of tax and also to effectively withdraw profits while leaving little for local participation which can then be shared equally. Another reason why this method is practiced is to avoid foreign exchange restrictions.
If you are associated with any kind of trading that involved transfer price, it is important that you consult a professional CA firm that can guide you effectively on this matter. A transfer pricing India company has the right kind of knowledge and experience to understand how these matters work and therefore they can offer you useful counseling and support. With their help, you can manage your international trading easily without worrying about tax and other legal ramifications. They can also help you to manage all the paperwork associated with such transactions and pricings.
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Originally published 2nd November, 2018
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.