Transfer Pricing means the price at which the transactions are being made between the related parties. For instances as during, labor between two departments or the trade of supplies. The concept of Transfer Pricing is used as and when small and individual entities of a bigger entity is operated separately and treated or measured differently from its parent firm. It is an accounting practice to represent the prices that one division of a company asks for, from the other unit for providing goods and services. Transfer Pricing has multiple benefits like tax savings for the enterprises, however the taxation authorities have their own ways of claiming the taxes from them. The transfer prices are based on the market prices charged on other divisions or units.
Documentation for Transfer Pricing:
The Organization of Economic Co-operation and Development (OECD) has issued report about the 15 Base Erosion and Profit Shifting (BEPS) Action Plans out of which 13 BEPS Action Plans provides the information related to the revised standards for transfer pricing documentation. A three-tiered structure has been introduced for the same. These are-
- The Master File: To provide a high-level overview of Transfer Pricing in India, master file is used. It contains all the relevant and standardized information of all the entities that are multi-national. It provides with the dealings of the multi-national groups at a global level. It gives the taxation authorities a very good idea about any risks involved in the organization.
- The Local File: It refers the local taxpayer’s each and every specific transaction. This file provides with the all the details. It contains the financial data and records and basic details about the transfer prices used by the enterprise and the method used to calculate them.
- The Country-by-Country Report: The Section 286 of the Income Tax Act, 1961 contains the regulations on Country-by-Country Report (CbCR). It is applicable on only those Constituent Enterprises (CEs) which are a resident of India. It can be said as a high- level report from the Multi-National Enterprises (MNEs) that requires all the details regarding taxes paid, global allocation of income accrued or earned and the location of the economic activity within the MNE group.
Objectives of Transfer Pricing Documentation:
The Transfer Pricing Documentation has various objectives for which they are required. These objectives are-
- To provide all the important and useful information to the taxation authorities so that they can employ this information while conducting the Transfer Pricing Audit in India. But as the audit concludes further additional documents are needed to be provided.
- To ensure that the taxpayers have a proper consideration about the requirements of transfer pricing to establish costs and prices and other necessary conditions for making any transaction between the two related parties. It also helps in reporting any income earned from these transactions while filing income tax return.
- To provide the taxation authority with the required information and sources to conduct a risk assessment in transfer pricing