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Transfer Pricing


Transfer pricing refers to the pricing of goods and services within a multi-divisional organization, particularly in regard to cross-border transactions. For example, goods from the production division may be sold to the marketing division, or goods from a parent company may be sold to a foreign subsidiary, with the choice of the transfer price affecting the division of the total profit among the parts of the company. This has led to the rise of transfer pricing regulations as governments seek to stem the flow of taxation revenue overseas, making the issue one of great importance for multinational corporations.


The subsidiary company buys goods at £100 each. They repack them and then export them from their country to our country, selling them to us at a price of £200 each. They are transferring them to us for a transfer price of £200.

So they have made a profit of £200-£100=£100 and we are getting them at a price of £200. This case is illustrated by Figure 1 (Case 1).

Having imported them at £200 each we sell them for £300 and thus make a profit of £300-£200=£100.

Our overall profit is thus £100 in the subsidiary company's host country and another £100 in the multinational's home country, a total of £200.

However, we need to consider the tax these companies have to pay on their profits, as the rates of tax (company or corporation tax) is different in the two countries.

The subsidiary has to pay corporation tax of 20% of the £100 profit and so the tax amounts to £20. Our home-country corporation tax is 60% of the £100 profit, and so our tax amounts to £60.

Overall, tax paid is £20+£60=£80 and this reduces our before-tax profit of £200 to an after-tax profit of £200-£80=£120.

The subsidiary contributed £80 to this profit, while our own operations contributed £40. The after-tax profit generated by us, that is by the parent company in the home country, was smaller because we paid corporation tax of 60% which compares with the subsidiary's 20%

All the numbers given so far are illustrated by Figure 1 (Case 1) . Our Finance Director points out that as the overall after-tax profit is 40% of the selling price we should be pleased with the outcome.

However, we can tell the subsidiary what to charge and can make the transfer price whatever we like. The transfer price is arbitrary, depending as it does only on agreement between ourselves and the subsidiary, and thus on ourselves.

More Cases Click here

Transfer Pricing Law In India

Increasing participation of multi-national groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multi-national group. With a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the case of such multinational enterprises, the Finance Act, 2001 substituted section 92 with a new section and introduced new sections 92A to 92F in the Income-tax Act, relating to computation of income from an international transaction having regard to the arm's length price, meaning of associated enterprise, meaning of information and documents by persons entering into international transactions and definitions of certain expressions occurring in the said section.

Section 92: As substituted by the Finance Act, 2002 provides that any income arising from an international transaction or where the international transaction comprise of only an outgoing, the allowance for such expenses or interest arising from the international transaction shall be determined having regard to the arm's length price. The provisions, however, would not be applicable in a case where the application of arm's length price results in decrease in the overall tax incidence in India in respect of the parties involved in the international transaction.

Arm's length price: In accordance with internationally accepted principles, it has been provided that any income arising from an international transaction or an outgoing like expenses or interest from the international transaction between associated enterprises shall be computed having regard to the arm's length price, which is the price that would be charged in the transaction if it had been entered into by unrelated parties in similar conditions. The arm's length price shall be determined by one of the methods specified in Section 92C in the manner prescribed in Rules 10A to 10C that have been notified vide S.O. 808 E dated 21.8.2001.

Specified methods are as follows:

a. Comparable uncontrolled price method;
b Resale price method;
c. Cost plus method;
d. Profit split method or
e. Transactional net margin method.

The taxpayer can select the most appropriate method to be applied to any given transaction, but such selection has to be made taking into account the factors prescribed in the Rules. With a view to allow a degree of flexibility in adopting an arm's length price the proviso to sub-section (2) of section 92C provides that where the most appropriate method results in more than one price, a price which differs from the arithmetical mean by an amount not exceeding five percent of such mean may be taken to be the arm's length price, at the option of the assessee.

For more details Click here

Report of the Expert Group on Transfer Pricing Guidelines

Share your thoughts on role Management Accountant in Transfer pricing both in employment and practice.


Santosh Puthran

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  1. Wikipedia :
  2. Transfer Pricing and Taxation by Manfred Davidmann:
  3. Report of the Expert Group on Transfer Pricing Guidelines :

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Anonymous said…
One of the challenges in complying with international transfer pricing rules is that they differ from country to country, including the documentation requirements.

For example, a company doing business in both India and the United States needs to justify their valuations of related-party transactions to the satisfaction of both the India and U.S. tax authorities.

For more information on the U.S. transfer pricing rules, please visit:

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