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An international transaction implies a transaction between two or more associated enterprises either or both of them are non residents.
In international transactions with a high scope of tax evasion, regulations such as Transfer pricing are mandatory. Transfer Pricing is the price of transactions between two companies (belonging to one group) residing in different geographies. From a tax point of view, Transfer pricing is critical as it involves complex calculations based on the type of transactions. Since transfer pricing impacts the taxation of the states directly, it is one of the most effective methods of optimizing Tax revenue in a country.
Transfer Pricing regulations are mandatory because of
Cross-border transactions owing to currency variations become complicated from a tax perspective. To simplify such transactions arising from an International or specified domestic transaction, Transfer pricing regulations use the Arm’s length
Arms Length Price can be defined as a price that is applied in a transaction between persons other than the associated enterprises in uncontrolled transactions.
The above matrix defines an International Transaction. Clearly, any transaction between two resident enterprises cannot be categorized as an International Transaction.
Depending on the types of transactions involved, there are five listed methods of calculating the Arm’s Length Price.
CUP: Comparable Uncontrolled Price Method
RPM: Resale Price Method
CPM: Cost Plus Method
PSM: Profit Split Method
TNMM: Transactional Net Margin Method
The above table elaborates these methods applicable to various categories of transactions
One of the above methods, the Most Appropriate Method defines the Arm’s length price of a transaction.
The selection of the MAM depends on many factors some of which are:
In cases where more than one Arm’s Length Price is determined using the MAM, an arithmetic mean would determine the Arm’s length price as per the below table.
Sl.No. | Particulars | Amount |
1 | Transaction price | A |
2 | Price computed with MAM | |
3 | CUP | B1 |
4 | RPM | B2 |
5 | TNMM | B3 |
6 | Arithmetic Mean of above 3 methods | C=(B1+B2+B3)/3 |
7 | Difference between transaction price & Arithmetic Mean | D=A-C |
8 | 5% of Transaction price | E=5% of A |
9 | If D>E | ALP(Arm’s Length Price)=C |
10 | If D<E | ALP(Arm’s Length Price)=A |
30th November is the statutory deadline for an accountant’s report in Form 3CEB along with the Income Tax Return after the end of the Financial year under consideration.
A penalty of 2% of the value of each international/specified domestic transaction is applicable for failing to comply with TP regulations, to maintain TP documentation or any kind of evasive act regarding the same.
The OECD contains updates and details of Transfer Pricing regulations and is a ready repository for any kind of information required.
Finally, in a bid to ensure compliance with Taxes and to widen the scope of International Taxation, Transfer Pricing guidelines are imperative. Transparency in international transactions leads to responsible business ethics and contributes to the country’s economy.
