Transfer Pricing is the general term used for the pricing of cross-border, intra-firm transactions between related parties and associated establishments. Around 60% of world trade actually takes place within multinational enterprises having presence in different locations in the world. With growing global trade, the National Government has made various laws regarding Transfer Pricing, with a view to maximize tax revenues. India, introducing its TP laws in 2001, ranks amongst the top three countries in terms of TP litigation with meager 2% share in global trade today. Ironically, only 10% of the TP cases litigated are decided in the favor of tax authorities. The legitimacy and efficacy of the tax enforcement becomes questionable with such a mismatch between the additional tax demands (amounting to Rs 46, 466 Crores for the year 2014–2015) and the judicial verdicts. This mismatch can potentially endanger the MNCs perceptions about the ease of doing business in India and consequently future Foreign Direct Investment. At the same time, tax enforcement machinery gets demoralized which is not conducive to good governance. This paper attempts to synthesize the issues in transfer pricing as the systemic dynamics between all the concerned agencies viz. the tax enforcement machinery and their procedures, adjudication, tax payers and their perceptions. It also endeavors to suggest an approach for the reforms needed in the system.
Issues in Transfer Pricing, Arms Length Price, Categorization, Tax Compliance, Systemic issues
