cross border taxation on start up companies - k....

Cross Border Taxation on Start up

Companies

By,Supreeth P

Tax System in India

K.Raghu & Co., Chartered Accountants

Tax Administration

Direct Taxation

(Administered by CBDT)

Income Tax Wealth Tax

Indirect Taxation

(Administered by CBEC)

Sales Tax

(Governed by State

Governments)

Excise DutyCustoms

DutyService Tax

Note - Wealth Act has been abolished vide Finance Act 2015.


Cross Border Transaction


What does it mean ?

A Cross Border Transaction or International Transaction can be defined as a transaction in an international trade between two or more entities beyond the territorial limits of a country or a transaction in a domestic trade in which at least one of the party is located outside the country of the transaction.


Kinds of Cross Border Transaction

• Cross-Border Financing

• Buying or Selling Products & Services

• Combined Research/ Shared Services


Cross Border Transactions by Start Up

Companies• Start Up Companies may engage in Cross Border Transactions in the

following manner –Type of Cross Border

TransactionUtility / Purpose of the

Transaction for Start – Up Companies

Taxes Applicable in India

Cross-Border Financing Capital Income Tax - Transfer Pricing (If Floated by Associated

Enterprise)

Buying or Selling Products & Services

Import / Export of Goods &Services

Customs Duty

Combined research / Shared services

Business Assistance Service Tax /Income Tax -Transfer Pricing (If Floated by

Associated Enterprise)K.Raghu & Co., Chartered Accountants

Transfer Pricing• Transfer Price is the price of transactions between associated enterprises

which may take place under conditions differing from those taking place between independent enterprises.

• The effect of transfer pricing is that the parent company or a specific subsidiary tends to produce insufficient taxable income or excessive loss on a transaction. For instance, profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high tax countries, and low transfer prices to move profits to subsidiaries located in low tax jurisdiction.


Income Tax on Transfer Pricing

• In order to ensure the Non - Shifting of Income to other countries through International Transactions, Income Tax Act prescribes prices to be considered for any International Transaction with associated enterprise known as “Arm's length price" .

• “Arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.


Transfer Pricing Methods• The arm's length price in relation to an international transaction or

specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :—(a) Comparable Uncontrolled Price Method (b) Resale Price Method(c) Cost Plus Method(d) Profit Split Method(e) Transactional Net Margin Method(f) Such other method as may be prescribed by the Board.


• Comparable Uncontrolled Price Method – Under this method, a third party price considered for identical goods, services, or property under identical conditions, called a comparable uncontrolled price (CUP), is considered to be the most reliable indicator of an arm's length price.

• Resale Price Method - Under this method, Goods regularly offered by a seller or purchased by a retailer to / from unrelated parties at a standard "list" price less a fixed discount are considered to be the most reliable indicator of an arm's length price.

• Cost Plus Method - Under this method, goods or services provided to unrelated parties which are consistently priced at actual cost plus a fixed markup is considered to be the to be the most reliable indicator of an arm's length price.


• Profit Split Method –In this Method, Firstly , to decide the sum of profit allots the total incorporated profits connected to a controlled transaction, not the total profits of the associate group as a complete. Secondly, to split the profit among the associate parties based on the comparative price of their assistance to the non-arm's length dealings, allowing for the functions assumed, the properties used, and the risks understood by each non-arm's length associate parties, in connection to what arm's length parties would have taken.

• Transactional Net Margin Method - The transactional net margin method compares the net profitability on controlled transactions with associated enterprise to the net profit obtained by broadly similar uncontrolled companies on similar transactions & the same is adjusted for to arrive at the Arm’s Length Price.


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