Question

QUESTION 1

You are about to enter the tax profession. Your future employer Tax Advice and Policy Services (TAPS) has stressed the importance of being able to clearly and professionally structure and present ideas, judgements and opinions. TAPS has informed you that in your new role, you could be expected to brief a wide audience including the Australian Tax Office, Treasury, international corporate taxpayers, and small business owners. TAPS is concerned that you may not fully understand the complexity of the taxation regime and the additional complications that COVID-19 has introduced to the fiscal system.

Fortunately, during your time at QUT you studied advanced tax law where the real world came to you and you heard from nine senior tax experts from around the world. Each were interviewed throughout your unit, sharing their insights into current problems and future challenges in tax.

TAPS has advised you that on your first day, you will be asked to prepare an internal briefing note to be circulated among the partners. This briefing note will be used to determine what section of the firm you are placed into. As part of that briefing note, you are asked to address the following:

c) Name one area of taxation you would like to explore further and explain why you think it is important.

Answer 1

One area of taxation to explore further and its importance: -

Transfer Pricing is the area to explore further .

In simple terminology, Transfer Pricing refers to the value attached to the sale/purchase of goods or services between related parties. It can also be defined in a way as the price paid for the goods transferred from two economic units situated in two different countries but bear the same control or subsidiary of the same parent company. The issue of transfer pricing arises when two or more business entities situated in two different jurisdictional areas which are related to each other in a way and they transfer some goods at a price which is affordably low. A situation in which the price of such goods would have been more; if the entities were not associated with each other. Such an issue further gives rise to a tax advantage. It is one of the key elements which are governing the International market from years. The companies dealing are International in nature but related to each other via common control and referred as Related Parties.

Importance of Transfer Pricing: -

Its main objective is to ensure that transactions between associated enterprises take place at a price as if the transaction was taking place between unrelated parties. Through Transfer Pricing Rules, the companies are able to maintain their business structure in a flexible manner. Effective planning schemes, allow the taxpayers to optimize the allocation of their income within their related group. But, it is also very important to comply with the transfer pricing rules so that the companies do not suffer consequences of double taxation at a later stage. Non- compliance can lead to expensive consequences for such multinational companies. It can also result in disputes with tax authorities that can further lead to litigation and substantial penalties.

Importance to Regulate Transfer Pricing

As it is mentioned earlier that the practice of Transfer Pricing is not abusive in itself but it can become illegal or abusive; it is used for evading the taxes or manipulating the prices of the goods. But any business entity runs for the purpose of earning as much profit as it is possible for them and while doing so they want to reduce the burden of tax so that that they can enjoy more of their earnings. The entities sometimes; for the purpose of achieving this goal engage themselves in such kind of malpractices that are abusive in nature and can lead to later consequences.

Transfer pricing is one of the many schemes that play a key role in supporting the multinational business entities in expanding their business globally and reducing the tax burden. The business entities sometimes, take advantage of this and manipulate the prices entirely. Interestingly; 60% of the global market is engaged in related party transactions so as to shift the profit to low taxed jurisdiction. Such kind of practices necessitates the regulation of Transfer Pricing.

Transfer pricing regulates the pricing scheme of the transactions taking place within the same groups or related entities to avoid further abuse. It decides strategies to calculate appropriate prices that are acceptable under such regulations. In India, the dire need was felt for the first time in the year 2001 and India introduced its first Transfer Pricing Regulations in the year 2001 itself via Finance Act 2001 that came into force from the financial year March 2002.