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Transfer Pricing
Transfer Pricing: Background
                           Globalization

        Increased cross border intercompany transactions

Manipulation of transfer prices in order to minimize the tax burden

         Tax authorities forced to regulate transfer prices

                      Arm’s length principle
Arm’s length principle
 The prices in intercompany transactions should not differ from the
  prices determined by unrelated parties
                                  &
 The profit or income accrued from intercompany transactions
  should not differ from the profit or income earned from
  transactions between unrelated parties.
GlaxoSmithKline
Taxation Blues
   Jan 7, 2004, IRS slammed GSK with a tax claim of $2.7 billion
   Transferred profits to parent Co. (UK)
   GSK America overpaid GSK British for drugs
   Overvalued cost of research in Britain
   Undermined marketing costs in America
   IRS settled $3.4 billion for the dispute
Compaq Computer Corporation
Compaq and Transfer Pricing
   In 1999, Compaq US received Tax deficiency notice & Penalties by IRS.
   Compaq Singapore sold PCAs to Compaq US at higher price.
   PCAs' transfer price of Compaq Singapore was 93.9% of Compaq US standard
    cost.
   Compaq Asia justified extra costs involved.
   Compaq US paid $2.9 million for setup & unrelated subcontractors.
Seagate Technology Inc.
Background
   In 1979, founded to make hard-disk drives for computers.
   In 1981, went public with its IPO.
   In 2000, back to private in a $20 billion stock swap.
   Conducts all manufacturing activities in Scott’s Valley,
Seagate and Transfer Pricing
Transfer Pricing Laws in India
 Section 92, by Financial Act, 2002
 Arm’s length price
 Specified method are as follows:
   Comparable uncontrolled price method
   Resale price method
   Cost plus method
   Profit split method
   Transactional net margin method
Thank You

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Transfer pricing

  • 2. Transfer Pricing: Background Globalization Increased cross border intercompany transactions Manipulation of transfer prices in order to minimize the tax burden Tax authorities forced to regulate transfer prices Arm’s length principle
  • 3. Arm’s length principle  The prices in intercompany transactions should not differ from the prices determined by unrelated parties &  The profit or income accrued from intercompany transactions should not differ from the profit or income earned from transactions between unrelated parties.
  • 4. GlaxoSmithKline Taxation Blues  Jan 7, 2004, IRS slammed GSK with a tax claim of $2.7 billion  Transferred profits to parent Co. (UK)  GSK America overpaid GSK British for drugs  Overvalued cost of research in Britain  Undermined marketing costs in America  IRS settled $3.4 billion for the dispute
  • 5. Compaq Computer Corporation Compaq and Transfer Pricing  In 1999, Compaq US received Tax deficiency notice & Penalties by IRS.  Compaq Singapore sold PCAs to Compaq US at higher price.  PCAs' transfer price of Compaq Singapore was 93.9% of Compaq US standard cost.  Compaq Asia justified extra costs involved.  Compaq US paid $2.9 million for setup & unrelated subcontractors.
  • 6. Seagate Technology Inc. Background  In 1979, founded to make hard-disk drives for computers.  In 1981, went public with its IPO.  In 2000, back to private in a $20 billion stock swap.  Conducts all manufacturing activities in Scott’s Valley, Seagate and Transfer Pricing
  • 7. Transfer Pricing Laws in India  Section 92, by Financial Act, 2002  Arm’s length price  Specified method are as follows:  Comparable uncontrolled price method  Resale price method  Cost plus method  Profit split method  Transactional net margin method

Notas del editor

  1. Extra cost justified as costs involving Overtime Compensation Rework performedChanges in material pricesChanges in the delivery scheduleMaterial cancellation costsInventory shrinkageProduction scrapSetup chargesObsolete inventoryActed as lead counsel in Compaq transfer pricing case, in which the Tax Court rejected $232 million in IRS transfer pricing adjustments and awarded Compaq a $21.3 million income allocation based on issues conceded by the IRS. Petitioner has satisfied its burden of proving that the prices in the intercompany transactions were consistent with arm's-length prices.