Mnc Transfer Pricing Under Scrutiny

The finance ministry is studying the practice of transfer pricing adopted by multinationals based here with respect to the dealings with their international affiliates in order to forestall any effort at understating their tax liability.

The system of transfer pricing determines the price at which products or technology are sold between group companies.

The ministry believes that with the steep cuts in import tariffs since 1991, several MNCs have started to source their imports components or products from foreign group companies.

Similarly, the domestic units engage in exports to either the parent outfit or affiliate companies. At present, there is no database in the country on the transfer pricing practice adopted by the MNCs vis-a-vis their affiliates.

 

They are not charitable organisations. In countries like America they know how these MNCs function, that is distribute their prices between branches and subsidiaries across the world and what part of it is in their country and what is remitted. So we have major gaps in the area, says a top government official.

Accordingly, the ministry has asked the National Institute of Public Finance and Policy to undertake a study on transfer pricing and the arms length practice adopted by MNCs operating in India. With the country accelerating the pace of liberalisation, especially with respect to foreign direct investment, more and more MNCs are expected to come in.

It may be recalled the revenue department had earlier ordered a crackdown on the practice of payment adopted by MNCs with regard to the emoluments of their employees. It was detected that in several instances part of the wage bill was paid by the company in the parent country because the income tax rates were much lower.

Following a request from MNCs, the revenue department had granted a grace period to these companies to pay up past tax dues. Subsequently, they altered this practice and started effecting the entire payment in India.

Similarly, it is now feared that MNCs tend to underinvoice their exports from India and overvalue the imports from their foreign affiliates located in countries with low tax regimes. By transferring the goods back to India (through imports) at a higher price, the incidence of tax on the domestic entity is considerably lowered.

Under the income tax laws, if a business transaction between a resident and a non-resident is so structured that it results in no profit or less than ordinary profit, the tax authorities may determine a reasonable amount of profit from the transaction.

The profit which is so assessed is added to the taxable income of the resident assessee. The profit may be determined with reference to the value of the transaction by applying the ratio of total business receipts or by using any other appropriate method.

But to invoke the necessary provisions in the Income Tax Act, 1961, the government will need to access a management information system on the behavioural pattern of the MNCs, not just within the country but also abroad.