Transfer Pricing Consulting

The increasing globalization of business, coupled with intensified scrutiny from tax authorities worldwide, has made transfer pricing a leading tax risk for multinational enterprises. Engaging specialized advisory services offers a multitude of compelling advantages that extend far beyond mere compliance.

1. Ensuring Regulatory Compliance and Avoiding Penalties: Adhering to the Arm’s Length Principle

The primary objective of transfer pricing regulations, globally and in India, is to prevent profit shifting and ensure fair taxation. Non-compliance can result in severe financial penalties, adjustments to taxable income, and legal disputes.

• Adherence to Arm’s Length Principle (ALP): The fundamental concept is that intercompany transactions must be priced as if they occurred between independent entities. Advisors help establish prices that meet this standard.
• Navigating Complex Local Laws: Each jurisdiction has its own specific transfer pricing rules, methods (e.g., Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM), Transactional Net Margin Method (TNMM)), and documentation requirements. Advisors ensure compliance with these varied regulations (e.g., Section 92A-F and Rule 10A-E of the Income Tax Act in India).
• Mitigating Penalties: By establishing defensible transfer prices and preparing comprehensive documentation, businesses significantly reduce the risk of facing hefty penalties from tax authorities for non-compliance. In India, for instance, aggregate international transactions exceeding INR 1 crore in a financial year mandate proper documentation.
• Country-by-Country Reporting (CbCR): For large multinational groups (consolidated revenue exceeding INR 6,400 crore in India), CbCR mandates a country-wise breakdown of income, taxes paid, and business activities. Advisors assist in preparing and filing these complex reports.

2. Mitigating Double Taxation Risk: Preventing Profits from Being Taxed Twice

One of the most significant risks for MNCs with unoptimized or non-compliant transfer pricing is double taxation, where the same income is taxed in two different jurisdictions.

• Coherent Profit Allocation: By ensuring that transfer prices are consistent with global tax regulations and economic substance, advisors help allocate profits appropriately, reducing the likelihood of overlapping tax claims by different countries.
• Dispute Resolution Mechanisms: Advisors can guide clients through dispute resolution mechanisms like Mutual Agreement Procedures (MAPs) or Advance Pricing Agreements (APAs) to prevent or resolve double taxation issues, offering prospective tax certainty.

3. Optimizing Global Tax Liabilities and Cash Flow Management: Strategic Tax Planning

While the arm’s length principle must be respected, effective transfer pricing can still optimize a group’s overall tax position within legal boundaries.

• Strategic Profit Allocation: Structuring intercompany transactions to align profit allocation with actual economic activities and value creation, potentially reducing overall global tax burdens.
• Efficient Resource Allocation: Transfer pricing can help manage costs and allocate resources more effectively across different subsidiaries, enhancing group-wide efficiency.
• Customs Duty Optimization: Strategically setting transfer prices can also influence customs duties, potentially reducing the duty base for goods shipped into high-tariff countries.

4. Robust Documentation and Audit Preparedness: Building a Strong Defense

Tax authorities worldwide are increasingly focusing on detailed documentation to support transfer pricing policies. Comprehensive and well-prepared documentation is key to defending against audit challenges.

• Master File and Local File: Advisors assist in preparing the Master File (providing a high-level overview of the MNE group’s global business) and Local File (detailing country-specific intercompany transactions and analysis) as required by BEPS Action 13 and local regulations.
• Functional, Asset, and Risk Analysis (FAR Analysis): Conducting detailed FAR analyses to clearly define the functions performed, assets employed, and risks assumed by each related entity in an intercompany transaction, providing a strong basis for pricing.
• Economic Analysis and Benchmarking: Performing robust economic analyses and benchmarking studies using reliable databases to find comparable uncontrolled transactions or companies, thereby justifying the arm’s length nature of prices.
• Audit Defense and Controversy Management: Providing expert support during transfer pricing audits, responding to information requests, and representing the client in discussions or disputes with tax authorities.

5. Aligning Transfer Pricing with Business Strategy and Value Chain: Holistic Approach

Transfer pricing should not be viewed in isolation; it must be aligned with the MNE’s overall business strategy, supply chain, and value creation model.

• Value Chain Analysis: Understanding how value is created across the MNE’s global operations and ensuring that transfer pricing policies reflect this value creation.
• Business Model Alignment: Ensuring that transfer pricing structures are consistent with the MNE’s operational realities and commercial arrangements.
• Impact of BEPS 2.0 (Pillar One & Pillar Two): With global tax reforms like BEPS 2.0 aiming for a global minimum tax and new profit allocation rules for large MNEs, transfer pricing strategies must be re-evaluated to ensure compliance and optimization. Advisors help assess the impact of these changes on existing transfer pricing models.