What are Transfer Pricing Rules?

February 16, 2023

The Income Tax department recently conducted surveys in BBC offices located in Mumbai, Delhi, and in different other cities in the country. According to the IT Department, the BBC has violated “TRANSFER PRICING RULES”. Transfer Pricing is a practice where one company charges another (in the same division). The parent company of both companies is the same.

In Simple Terms Example

Take, two Companies Company A and Company B. Parent Company of both companies are the same. For instance, the parent company of “BBC UK” is in London. Now assume, Company A is “BBC India” and Company B is “BBC USA”. Now company A is selling XYZ goods and services. Company B is selling PQR goods and services.

Say company A is selling XYZ in the international market. It is also selling to Company B. Now, company B is requesting A to provide the goods at reduced price. With the parent company’s (BBC UK) insistence, company A too sells its goods to B at reduced prices. With this, the profit of company B increases because its cost of raw material decrease. But the profit of company A decreases because it is selling its products at a reduced rate. However, the overall profit of the parent company is the same.

What is the issue?

Say company A is located in a higher tax country as compared to company B. In such cases, the parent company saves taxes. Government loses its revenue!

Bottom Line

The companies use transfer prices to charge above or below the market price to reduce the tax burden. According to the IT department, BBC is misusing transfer pricing.

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