International-Business-Dr-R-Chandran-E-book

127
International Business- Dr. R. Chandran
distribution give advantages to existing firms and impose barriers against
newcomers.
Due to these and other imperfections, firms locate their production and
other operations internally. As these market imperfections disappear, the
importance of MNCs may diminish. The days for this may not be far off due
to the international apex body, WTO and its regulatory norms are strictly
implemented in near future.
TRANSFER PRICING
Transfer prices are the charges made when a company supplies goods,
services or finance to another company to which it is related. It is an
internationally accepted principle that transactions between related parties
should be based upon the same terms as those between unrelated parties.
Thus both tax treaties entered into between countries and domestic tax
legislation of various countries have adopted the arm’s length principle.
Abuse of Transfer Pricing
In the era of global competition transfer pricing has became an unwanted
reality. The price charged by a company in Country A to another company
in Country B is reflected in the profit and loss account of both the
companies, either as income or expenditure, and impacts the tax paid by the
two related companies. By resorting to transfer pricing, related entities can
reduce their total taxation by transferring higher income to low-tax
jurisdictions and greater expenditure to those jurisdictions where the tax rate
is very high. For example, the current tax rate on domestic companies in
India is 33.3%. Take an example, the Company A is located in India and
Company B in Singapore, and that both belong to the same group. If the tax
rate in Singapore is 15% then Company B will transfer raw material to
Company A at slightly higher prices. This will enable Company A to show a
higher expenditure and reduce its taxable profits. On the other hand, a
slightly higher income will not harm Company B much as the tax rate in its
country is very low, thus the global group as a whole will benefit form tax
savings. In this game, the first country is the major loser and due to low
profits employees may struggle for their incentives.
Detection of Transfer Pricing
Only for Private Circulation