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Indian tax authorities get kudos from MNCs on transfer pricing
December, 22nd 2007
Indian tax authorities have one more reason to celebrate as multinationals feel that India is better armed with 'transfer pricing' expertise than many other developed nations like the US, Germany and Japan.

More than 50 per cent of the global companies, according to a survey on Transfer Pricing conducted by financial advisory firm Ernst and Young, feel that level of expertise of Indian tax authorities in dealing with the transfer pricing issues is very good.

Transfer pricing is the mechanism adopted by multinationals for valuing goods and services traded with their subsidiaries or associate companies abroad so as to lower taxes and maximize profits.

Based on the mechanism, the parent company values goods sold to their subsidiaries at a higher price in nations with higher taxes to show lower profits so that they pay less taxes.

To ensure that multinational companies do not pay less taxes, the yardstick of Arms Length Price is adopted, by which goods sold by these firms to their subsidiaries are taken as the goods sold to independent parties and valued accordingly.

According to the survey, 57 per cent respondent companies have expressed faith in the transfer pricing expertise of Indian authorities, which is significantly higher than the figures for developed countries including the US.

In case of US, only 33 per cent of the respondent companies believe that American authorities have requisite expertise in dealing with transfer pricing issues. The figure was lower at 32 per cent in case of Canada and 25 per cent for Brazil.

The Transfer Pricing policies of several countries are based on the Organization of Economic Cooperation and Development Guidelines on the subject.

The companies in India also believe that documentation work for transfer pricing has assumed enough importance in the last two years, the survey adds.

Interestingly, China one of India's economic rivals, has no laws for transfer pricing but hopefully the regulations are expected soon.

India on the other hand had incorporated regulations on transfer pricing in the Income Tax Act in 2002. The regulation says, "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".

Overall, taxpayers have very limited experience with transfer pricing litigation, the survey said, adding only 28 instances of litigation were reported by 850 companies in 2007.

Of the few cases reported, it added, a disproportionate number occurred in Germany and Canada, with each having five cases reported (collectively accounting for 36 per cent of the total).
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