TP Planning, Documentation and assistance in Compliances

The tremendous increase of trade and investment as well as the development of international connecting networks have both been significant occurrences in India this century. Many multinational corporations are expanding their related party transactions to strengthen their supply networks in response to the fiercer competition. Due to the rise in cross-border tax authority collaborations—which come with both benefits and risks—TP Preparation, Documentation, and Compliance Support are now more important than ever for all corporate entities.

The price at which goods and services are transferred between different divisions of the same business is known as transfer pricing. The price of transactions involving related parties exerting common control, also known as intra-group transactions, is what is meant by transfer pricing, to put it another way.

Transactions involving transfer pricing must be properly complied with, since failure to do so would result in severe penalties. Taxpayers must go through a difficult procedure of self-compliance in cross-border transactions in order to avoid these fines.

Objectives of Transfer Pricing Planning, Documentation and Compliance Assistance

The following are its goals:

to make it easier to evaluate each corporate division independently and produce distinct earnings for each division.

Transfer pricing has an impact on both the company’s resource allocation and the reported earnings of each centre. As a result, it is important to evaluate the costs incurred by each division of the organisation because those costs will be used as resources by the other division.

Urge the taxpayers to view this as a crucial procedure to guarantee accurate tax return submission.

Providing reliable data will help with risk assessment.

Common Issues in Transfer Pricing faced by the Company

A corporation frequently has problems with transfer pricing; a few of the typical problems are described below:

There are disagreements among the divisional managers on the choice of transfer pricing methodology.

Transfer pricing must be configured such that the organization’s accounting system complies with the applicable transfer pricing regulations. However, businesses frequently discover that transfer price planning is an expensive and time-consuming procedure.

managers of the organisational unit acting dysfunctionally as a result of arm’s length prices.

Because each part of the corporation performs distinct responsibilities, the value of transfer pricing determined by the company is frequently inappropriate for each division.

The corporation views the multinational setting of the transfer pricing issue as being particularly complex.

Importance of Transfer Pricing Planning, Documentation and Compliance Assistance

The following justifies the importance of transfer pricing compliance:

It gives the MNC control over decisions about the allocation of profits and costs to the subsidiaries located in several nations.

Improved management, reporting, and accounting for the organisation can all benefit from better transfer pricing planning.

For a corporation engaged in cross-border intercompany transactions, transfer pricing planning, documentation, and compliance assistance are crucial since they help the company avoid penalties due to ignorance.

Companies may find it to be time- and money-efficient, and the process may be greatly streamlined.

It serves as evidence that the Arm Length Principle has been followed.

It guarantees that the Form 3CEB, master file, and CBC report are in sync with the documentation.

Documentation required as per the Income-tax Act 1961

Every person engaging in an international or domestic transaction is required by section 92 D of the Income Tax Act of 1961 to retain the information and related documentation.

According to Rule 10D of the Income Tax Regulations of 1962, a list of papers is provided.

Company description and industry profile related to the entity Ownership Profile of the international organization’s structure

Price related

 The method’s specifics are taken into account together with the arguments against using alternative ways.

Record of financial projections, predictions, and budgets

Terms and characteristics, including the cost of foreign transactions.

the functional analysis’s specifics

Market history and economic analysis records

If there are any other analyses to compare international transactions to uncontrolled transactions, please provide them (s)

 Transaction related

 Information on the transfer pricing adjustment(s) made (if any)

Any further information, including statistics, papers like invoices, agreements, and correspondence pertaining to prices

 The flow of Transfer Pricing Documentation

 The process outlined below is used to complete the transfer pricing documentation.

a succinct summary

industry research

Business analysis Intercompany exchanges

Functional evaluation

Assessment of techniques

economic evaluation

Conclusions

For the documentation of the local file that the company creates, the aforementioned flow is used.

Master File

If the business meets the following requirements, the ITR Department will prepare the master file.

The total value of all foreign transactions exceeds Rs. 50 crores and the international group’s consolidated income for the accounting year is Rs. 500 crores, or the total value of all international transactions involving intangible property exceeds Rs.

Country by Country Report

If the multinational group has a consolidated revenue of Rs. 6,400 crores, the ITR department prepares this report.

This is the three-tier structure for transfer pricing documents.

Companies that are subject to transfer pricing regulations are required to submit ITRs by the tax year’s deadline of November 30. The documents must be created for a period of eight years, measured from the end of the applicable tax year, and they must be updated annually going forward.

In addition, a form 3CEB independent accountant report on the foreign transactions between AE Affiliated Enterprises is necessary and must be provided by November 30th with the ITR.

Penalties for Non-Compliance of the Transfer Pricing as per the Income Tax Act 1961

As per tax law, the following are the consequences for not complying with transfer pricing:

Section 270A

This clause states that a corporation that fails to declare overseas transactions would be penalised for underreporting and will be responsible for paying either 50% or 200% of the total tax due in cases of underreporting or misreporting.

271AA

This section outlines the punishment for failing to keep proper records as required by section 92D of the ITA 1961, failing to record a transaction, and providing false information or documents. The amount equal to 2% of the value of the foreign transaction will be the defaulter’s responsibility.

271 G

This section specifies the 2% of the value of the international transactions fine for failure to provide papers in accordance with section 92D (3) of the tax legislation.

271BA

This section indicates the penalty for failure to produce an accountant report in form 3CEB as per section92E of the ITA 1961.

TP Planning, Documentation and Assistance in Compliances: Our Role

The following are some ways that Enterslice can assist a client with TP Planning, Documentation, and Help with Compliances:

Assessment of potential adjustments and penalties

Establish the exposure to transfer pricing modifications, help reduce fines, and aid in the implementation of reporting standards.

Transfer Pricing Policy

By assigning the assets, functions, and risks in the particular jurisdiction, our team of experts may assist in planning a worldwide transfer pricing strategy and optimising the outcomes.

Benchmark Analysis

to establish target profit margins based on the scenario that is suggested for using data from a confidential database.

Valuation of Intangibles

Intangibles of parties with relationships are valued

Synchronous Documentation

We assist with Treasury Regulation compliance to lower the likelihood of transfer pricing adjustment and avert any penalty assessments.

Dispute Resolution

Represent on behalf of the taxpayer in coordination and submission of application with the competent authorities to reduce the double taxation risk, transfer pricing examinations and negotiation of Advance Pricing Agreements.

Frequently Asked Questions

What is the meaning of the Arm’s Length Principle?

The Arm’s Length Principle states that the transfer pricing for any goods or services that two related companies decide on should be the same as the price that two unrelated companies would have decided on in a comparable transaction.

What are the methods of Transfer Pricing?

There are five different transfer pricing strategies, including:

• Comparable Uncontrolled Price Method

This approach focuses on contrasting the terms and cost of the goods and services on the controlled transaction with those on an uncontrolled transaction in an unrelated business.

The Resale Price Method

With this strategy, comparable transactions between linked and unrelated businesses are compared based on their gross margins.

• Cost Plus Method

Here, a comparison between gross profits and total sales costs is made.

Comparable Profit Method

The Transactional Net Margin Technique is another name for this approach. The net profit of a controlled transaction involving linked firms is contrasted with the equivalent uncontrolled transactions involving unrelated enterprises to calculate the transfer prices in this case.

• Profit Split Method

With this approach, the transfer pricing is calculated by dividing the profits amongst the associated entities.

When can a company be considered as an associated enterprise in reference to transfer pricing?

 If a business engages in the control, management, or capital of another business either directly, indirectly, or through an intermediary, it is deemed to be an associated enterprise. if any members of that company have a direct, indirect, or indirect indirect interest in the capital, management, or control of the other company. The Income Tax Act of 1961’s Section 92 A details the additional circumstances.

 What are the details required for Form 3CEB?

The information should pertain to the –

general information about the application, total foreign transaction value, and SDT

During FY, foreign tractions were introduced.

Certain domestic transactions made throughout the fiscal year.

Is Transfer Pricing Policy Different from Transfer Pricing Documentation?

Yes, the transfer pricing policy is created before the transfer pricing documentation is created in order to determine the various types of international party-related transactions and the arm’s length margin calculation. The transfer pricing documentation is created at the end of the financial year in order to determine whether the transfer pricing policy was successfully implemented.

Is the company required to prepare the Transfer Pricing Policy as well as Transfer Pricing Documentation?

There is no such requirement, but it is encouraged to be ready in order to maintain consistency and enhance business operations.

What are the factors that can affect transfer pricing?

Tax policies, inflation, anti-dumping laws, import taxes, competitive pressure, the transfer or host nation, the nature of the transaction, and exchange restrictions on products and services are some of the considerations.