Question

1. Your client is a multinational corporation and is planning to manufacture certain products in a low tax international subsidiary that is 100% owned. The subsidiary would manufacture and sell the products to the US parent, and the parent would sell to unrelated customers.

a. Summarize the functions and risks that the company should consider in developing the transfer pricing documentation for this transaction.

b. What financial reporting and tax return matters should the company consider?

c. What information should you request from the client?

Answer 1

ANSWER

B).

In case of financial reporting, a consolidated financial statement would be prepared of holding and subsidiary co. in which stock purchased net of unrealised gain on stock at year end would be taken.

Even the disclosure of stock purchased by holding co from subsidiary co has to be made by management in schedules and notes to accounts.

As far as Tax returns matters we have to give details of any payment made by holding co to subsidiary co during the year(i.e., related party transaction) along with name and the price at which the transactions were made has to be disclosed.

C)

The following documents will be acquired from the client-

1. The date when the parent company acquired the international subsidiary and terms of agreement that its a 100% owned subsidiary of US multinational co.

2. Terms and conditions/ agreement entered between the holding co and subsidiary co to obtain the price at which agreement is made to supply products by subsidiary co to holding co.

3. As holding and subsidiary co are related parties hence price fixed is determined to see whether the exchange is taking place at markets rates or at rate lower than market rates to provide undue advantage to holding co.

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