Indian Government Announces Transfer Pricing Relaxation

by Mary Swire, Tax-News.com, Hong Kong

02 August 2001

Following the introduction of the first detailed transfer pricing regulations in India earlier this year, the government recently announced that it would be relaxing its transfer pricing norms when the Revenue Department releases new guidelines.

Transfer pricing is the process by which multinational entities set the prices at which they transfer goods, services, and know-how between associated companies; by manipulating a cross-border transfer price, a company is in a position to show more profits in a country with low tax rates, and conversely, less profits in high tax countries. It has become an issue of greater concern of recent times in India because of the beneficial effect that increased globalisation has had on foreign direct investment (FDI) into the country.

OECD guidelines currently advocate an 'arms length' model for determining the transfer price, and Indian company Kasturi & Sons announced that it expected the new guidelines to prescribe only five methods for taxpayers to use when calculating arm's length pricing, namely: comparable uncontrolled price methods, resale price methods, cost-plus methods, profit split methods, and transactional net margin methods.

The Indian Revenue Secretary, Shri S. Narayan said late last month that he had decided to permit a 10% range for calculating an arm's length price, which means that companies will soon be able to use a 5% band above and below the mean.

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