Introduction: Amidst heightened scrutiny of multinational corporations (MNCs) over their tax practices, transfer pricing emerges as a key strategy for allocating revenues and costs among subsidiaries. While designed to ensure equity, transfer pricing can be exploited to shift profits from high-tax to low-tax jurisdictions, reducing overall tax obligations. This article comprehensively explores common manipulative techniques employed by MNCs and delves into measures, including India’s regulatory framework, to combat these practices.

Transfer Pricing Practices in India:

1. Comparable Uncontrolled Price Method: Compares transaction prices between affiliated and unrelated entities. 2. Cost-Plus Method: Involves adding a markup to the actual cost incurred for goods or services. 3. Resale Price Method: Determines the resale value by deducting a gross margin from the price offered to unrelated parties.

Measures to Combat Manipulative Practices:

1. Transfer Pricing Regulations: Enforced by many countries to ensure adherence to specific methods and documentation, aligning with the actual value of transactions.
2. Country-by-Country Reporting: Requires MNCs to provide detailed data on operations, profits, and taxes in each country of business, aiding tax authorities in identifying potential issues.
3. Advance Pricing Agreements: Agreements between MNCs and tax authorities to establish a solid transfer pricing plan for certain transactions, minimizing conflicts.
4. Tax Audits: Authorities use audits to scrutinize documentation and methodologies related to transfer pricing, ensuring compliance with market rates.
5. International Cooperation: Essential for sharing information on transfer pricing practices and coordinating efforts to address tax avoidance by MNCs.

Findings & Recommendations:

Findings:

• MNCs often use transfer pricing manipulatively to reduce tax obligations.
• Preventative measures are crucial to curbing abusive transfer pricing practices.

Recommendations:

1. Enhanced Transparency: Governments should enforce higher transparency standards, requiring MNCs to disclose transfer pricing policies and details on intra-group transactions.
2. Coordinated Tax Authorities: Improved coordination and cooperation among tax authorities to share information effectively and address abusive transfer pricing practices.
3. Stricter Penalties: Governments should impose stricter penalties on MNCs engaging in abusive transfer pricing practices.
4. Transfer Pricing System Reforms: Collaborative efforts to reconstruct the transfer pricing system, ensuring MNCs contribute equitably to the operating country’s revenue.

Conclusion:

This article emphasizes the need for reforms in the transfer pricing system to guarantee that MNCs pay their fair share of taxes and contribute to social-economic development. The proposed reforms aim to enhance transparency, foster fairness, and prevent manipulative practices. Governments, through collaborative efforts, can create a scenario where MNCs contribute equitably to the revenue of the countries in which they operate.