Question

Discuss how the tax legislation of transfer pricing could ensure tax compliance and minimize risk in connection with the cross border between associated multinational corporations. You are required to support your discussion with an appropriate illustration.

Answer 1

Transfer Pricing is the value as charged for for transfer of goods or providing the service. However with
reference to tax legislation, transfer pricing the value as charged for transfer of goods or proving service
to an associated or related part.
In current scenario multination business (cross border) transaction is getting increased day by day. So on
what basis transfer price is determined by a unit of one contry to the associated or reated unit of other
country is very imporant. The object of transfer pricing concept in taxation has come, when it come to notice
that some companies are trying to avoid tax by transfering their goods at very less price or almost at cost to the
related party in other country, where tax rate is low rather than selling the same in it's origin country, where tax
rate is high. Due to this tax avoidance practive, risk of revenue loss has increased.
Risk of revenue loss due to wrong pricing methodology is influenced as control of holding company on subsidiary
and other associates and they can influence the decision of related parties. To curb the risk of revenue loss,
government has amended tax legislation in alost every country to minimise the risk of revenue loss at minimum.
Under the new tax legislation, tax rule say that if any company or entity trannsfering goods or proving services to
related party (subsidiary or associates) then that price should not be lower than "Arm Length Price". Arm lenghth
price is determine on the basis of many method, in which one of the method is Comparable Uncontrolled Price
(CUP) method, which determine transfer price equal to not less than the sale price charged to non related party
in same time period.
For example, An Manufacturing company in India transfer the capital goods to it's holding company at	₹ 5,00,000
which is situated in Nigeria. While the same goods exported to an unrelated part in US at sale price of	₹ 6,00,000
So transfer pricing tax legislation consider the taxable profit based on arm length price at sale price of	₹ 6,00,000
By this way transfer pricing tax legislation reduce the risk of loss of revenue at minimum.