Indian tax and revenue departments require economists and statisticians to untangle the nitty-gritties of transfer pricing, the country's single-largest international tax issue.
With the advancement of globalisation, India is slated to be one of the biggest gainers on the economic front and hence advancement in taxation is very important, according to Klaus Vogel, an expert on interpretation of double taxation treaties across the world.
Transfer prices are the charges made when a company supplies goods, services or financials to another company to which it is related, like its subsidiary or sister concern. It is a globally accepted principle that transactions between related parties should be based on the same terms as between unrelated parties.
In an exclusive interview to Business Standard, Vogel said, "India is on the threshold of a transfer pricing era - the hottest topic in the taxation sector." He is also addressing the three-day "11th Annual International Taxation Conference - 2005," in Mumbai beginning Thursday.
He was of the opinion that transfer pricing was the single-biggest international tax issue in India since new rules were introduced under the Finance Act in 2001.
These rules were complex and had an impact on all cross-border transactions with overseas associated entities. As they were based on subjective considerations, they often became judgemental, resulting in litigations, he said.
The concept is picking up in India, with the country signing over 60 bilateral agreements with other nations. Even though there was no guarantee that these agreements would be honoured, which most often were subject to interpretations, India was increasingly becoming recognised in the global transfer pricing sector, which was good for its trade and commerce.
On the flip side, lack of experience and bad interpretations were the reasons for lower profit for companies indulging in transfer pricing. Transfer pricing would also lead to double taxation, which was the biggest barrier for trade across the world.
In India, IT and BPO firms, pharma majors and foreign banks are the major companies involved in transfer pricing. On the transfer pricing issues across the globe, Vogel said it should be conducted on an "arm's length principle". This principle would avoid the creation of tax advantages or disadvantages that would otherwise distort the relative competitive position of either type of entity.
The arm's length price is determined through various methods like "comparable uncontrolled price method", "resale price method", "cost plus method", "profit split method" and "transactional net margin method", among others.
By separating tax consideration from economic decisions, the arm's length principle is expected to promote the growth of international trade and investment. Transfer pricing helps related entities to reduce global incidence of tax by transferring higher income to low-tax jurisdictions or greater expenditure to those jurisdictions where the tax rate is high.
He felt taxmen should think from the shoes of the businessmen, as their professions were contradictory. The taxmen wanted to extract money from the businessmen, who wanted to keep all the money to themselves, he said in a lighter vein.
