TRANSFER PRICING: MEANING & OBJECTIVE

Aims & Objective Of  Transfer Pricing:

1. Transfer pricing minimizes the tax burden or arranging direction of cash flow:

Transfer price, as aforesaid, refers to the value attached to transfer of goods, services, and technology between related entities such as parent and subsidiary corporations and also between the parties which are controlled by a common entity. Its essence being that the pricing is not set by an independent transferor and transferee in an arm’s length transaction. Transaction between them is not governed by open market considerations.

2. Transfer pricing results in shifting profits:

Whatever the reason for fixing a transfer price which is not arm’s length, the result is the shift of profit. The effect is that the profit appropriately attributable to one jurisdiction is shifted to another jurisdiction. The main object is to avoid tax as also to withdraw profits leaving very little for the local participation to share. Other object is avoidance of foreign exchange restrictions.

3. Shifting of Profits- Tax avoiding not the only object:

Transfer between the enterprises under the same control and management, of goods, commodities, merchandise, raw material, stock, or services is made at a price which is not dictated by the market but controlled by such considerations such as: • To reduce profits artificially so that tax effect is reduced in a specific country; • To facilitate decentralization of production so that efforts are directed to concentrate profits in the State of production where there is no or least competition; • To remit profits more than the ceilings imposed for repatriation; • To use it as an effective tool to exploit the fluctuation in foreign exchange to advantage.