TP Planning, Documentation and assistance in Compliances

TP Planning, Documentation and assistance in Compliances

Get our specially curated Transfer Pricing Service for your business, for maximising your business profits.

Package inclusions:
  • Assessment of potential adjustments and penalties
  • Drafting transfer Pricing Policy
  • Benchmark Analysis
  • Valuation of Intangibles
  • Synchronous Documentation
  • Assistance in Dispute Resolution
TP Planning, Documentation and assistance in Compliances

TP Planning, Documentation and Assistance in Compliances: An Overview

India has witnessed two major events this century: the rapid expansion of trade and investment and the growth of global connection networks. With the increasing competition, many multinational organisations are expanding their related party transactions to improve their supply chains. This has increased cross-border tax authority collaborations, which simultaneously entail opportunities and risks, making TP Planning, Documentation and Assistance in Compliances quite crucial for all business entities. 

Transfer Pricingis the value at which the goods and services are transferred between separate divisions of the same company. In other words, Transfer Pricing refers to the price of transactions between related parties exercising common control, commonly referred to as intra-group transactions. 

Transfer pricing transactions require proper compliance as the default in the same will result in the imposition of heavy penalties. To avoid these penalties, taxpayers should carry out a process of self-compliance which is a complex task incross-border transactions. 

Objectives of Transfer Pricing Planning, Documentation and Compliance Assistance

 It has the following objectives –

  • To facilitate the evaluation of each company's division separately and generate separate profits for each division.
  • Transfer pricing affects the reported profits of every centre as well as the allocation of the resources of the company. Hence, it becomes necessary to assess the cost incurred by each division because the cost incurred by one division will be considered as a resource for the other division of that company. 
  • Encourage the taxpayers to consider this as an essential practice to ensure proper filing of tax returns.
  • Provide accurate information to facilitate risk assessment 

Common Issues in Transfer Pricing faced by the Company

A company often faces issues regarding Transfer Pricing; some of the common issues are listed below-

  • Difference of opinion among the divisional managers regarding the selection of the method to transfer pricing.
  • Transfer pricing must be set in such a way that the company's accounting system is according to the transfer pricing rules. But, the companies often find transfer pricing planning to be an expensive and time-consuming process.
  • Dysfunctional behaviour by the managers of the organisation unit due to the Arm's length prices.
  • The value of transfer pricing set by the company is often not suitable for every division of the company because each division performs different functions.
  • The Transfer pricing issue is a multinational setup which is considered quite complicated by the company.

Importance of Transfer Pricing Planning, Documentation and Compliance Assistance

Transfer Pricing Compliance is important due to the following reasons- 

  • It provides discretion to the MNC about the matters regarding the distribution of profits and expenses to the subsidiaries situated in different countries.
  • Better Transfer Pricing Planning can help better the management, reporting and accounting of the company.
  • Transfer Pricing Planning, Documentation and Compliance Assistance is important for a company involved in cross-border intercompany transactions as ithelps the company avoid any penalties resulting from lack of awareness. 
  • It can be time effective and cost-effective for the companies, and the procedure can be simplified to a great extent. 
  • It acts as proof of compliance with the Arm Length Principle.
  • It ensures that the documentation is in Sync with the Form 3CEB, master file and CBC report.

Documentation required as per the Income-tax Act 1961 

According to section 92 D of the Income Tax Act 1961, it is mandatory for every person entering into an international or domestic transaction to maintain the information and documents of the same. 

The list of documents is provided under Rule 10D of the Income Tax Rules 1962 

Entity related 

  • Business description/ Profile of industry 
  • Ownership Structure 
  • Profile of the multinational group

Price related 

  • Details of the method are considered with reasons for rejecting other methods.
  • Record of budgets, forecasts, financial estimates 
  •  Terms and nature (inclusive of the price of the international transactions.
  •  Details of the functional analysis 
  • Records of the market and economic analysis
  • Any other record of analysis (if any) to evaluate the comparability of international transactions with the uncontrolled transaction(s)

Transaction related 

  • Details of transfer pricing adjustment(s) made (if any) 
  • Any other information, e.g., data, documents like invoices, agreements, price-related correspondence 

The flow of Transfer Pricing Documentation 

The Transfer Pricing Documentation is done in the below-mentioned flow.

  • Executive summary 
  • Industry analysis 
  • Company analysis Intercompany transactions 
  • Functional analysis 
  • Evaluation of methods 
  • Economic analysis 
  • Conclusions

The above-mentioned flow is followed for the documentation of the local file, which is prepared by the company.

Master File 

The ITR Department prepares the master file if the company fulfils the following criteria. 

The aggregate value of international transactions is more than Rs. 50 Crores and the international group have consolidated revenue of Rs 500 crores for the accounting year, or the Aggregate value of international transactions related to the intangible property is more than Rs 10 Crore.

Country by Country Report

The ITR department files this report if the international group have a consolidated revenue of Rs 6,400 crores.

This is the 3 tier documentation structure for Transfer Pricing.

The companies who are applicable for transfer pricing must file the ITR by 30th November of the tax year, and the documents shall be prepared for a period of 8 yrs. which is calculated from the end of the relevant tax year and need to be updated annually on an ongoing basis.

Apart from this, it is important to get an independent accountant report in form 3CEB regarding the international transactions between AE Associated Enterprise, which shall be submitted by 30th November along with the ITR.

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

The penalties for non – compliance with the transfer pricing as per the tax legislation are given below-

Section 270A

According to this section, the company that fails to report the international transactions will have to bear the penalty for underreporting and would be liable for paying  50% of the amount of the total tax payable in case of underreporting and 200% in case of misreporting.

271AA

This section provides the penalty for non-maintenance of the proper documentation as per section 92D of the ITA 1961 or failure to record a transaction or furnishing wrong information or document. The defaulter shall be liable for the amount equivalent to 2 %of the value of the international transaction.

271 G

This section prescribes the penalty for failure to furnish documents as per section 92D (3) of the tax legislation, which is 2 % of the value of the international transactions.

271BA

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

TP Planning, Documentation and Assistance in Compliances: Our Role

Enterslice can help the client in TP Planning, Documentation and Assistance in Compliances by the following –

Assessment of potential adjustments and penalties

Determine the exposure of transfer pricing adjustments, assist in minimising penalties, and help implement reporting standards.

Transfer Pricing Policy

Our team of professionals can help to plan a global transfer pricing strategy and optimise the results by allocating the assets, functions and risks in the specific jurisdiction.

Benchmark Analysis

To determine target profit margins based on the proposed scenario for utilising data from a proprietary database.

Valuation of Intangibles

To value intangibles of related parties

Synchronous Documentation

We Help to comply with Treasury Regulations to reduce the chances of transfer pricing adjustment to avoid potential assessment of penalties.

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

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.

There are five methods of Transfer pricing, which are-

  • Comparable Uncontrolled Price Method 

This method focuses on comparing the conditions and price of the products and services of the products on the controlled transaction to an uncontrolled transaction in an unrelated company.

  • The Resale Price Method 

In this method, the comparison is made on the basis of gross margins of comparable transactions of the related and unrelated companies.

  • Cost Plus Method 

Here the comparison is drawn between the gross profits and the overall sales cost.

  • Comparable Profit Method

This method is also known as the Transactional Net Margin Method. Here the transfer prices are determined by comparing the net profit of a controlled transaction amongst the associated enterprises with the comparable uncontrolled transactions of unrelated enterprises.

  • Profit Split Method 

In this method, the related companies split their profits to determine the transfer pricing. 

A company is considered an associated enterprise if it directly, indirectly, or through an intermediary participates in the control, management or capital of the other enterprise. If the persons of that enterprise directly, indirectly or through an intermediary participate in the control, management or capital of the other enterprise. The other circumstances are provided in section 92 A of the Income Tax Act 1961.

The details should be about the –

  • General information of the applicant, along with the aggregate value of international transactions and SDT
  • The international tractions entered during FY.
  • Specific Domestic Transactions entered during the FY.

Yes, Transfer Pricing Policy is formed prior to starting the Transfer Pricing Documentation to ascertain the different types of international party-related transactions and calculation of arm length margin, whereas Transfer Pricing Documentation is prepared at the end of the financial year to check if the Transfer Pricing policy was implemented successfully or not.

There is no such compulsion, but it is advised to prepare both to have a consistent approach and facilitate better company functioning.

The factors are tax regimes, inflation, anti-dumping legislation, import duties, competitive pressure, the transfer or host country, nature of the transaction, and goods and services exchange control.

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