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Transfer pricing -USA

Tax queries 89 views 1 replies

Rahul Dixit

0 Points Joined December 2019

Hi I have opened 1 company in USA which is 100% subsidiary of Indian company. USA company provides manpower services to US customers. The services provided by US company is fully provided by Indian company.

Therefore US company is paying 90% of revenue to Indian company because the manpower services is provided by Indian company.

Following are the reason-

1.Now whether Indian company is at arms length by taking 90% of its revenue?

2. Can TNMM will be Most appropriate method?

3. Can US company retain only 5% and shift all the revenue to Indian company

Replies (1)

Rama chary Rachakonda

Master in Accounts & high court Advocate

9447 Points Joined December 2011

I'll address your questions regarding the arm's length principle, Transfer Pricing Methods, and revenue allocation between the US and Indian companies.

Arm's Length Principle The arm's length principle states that transactions between associated enterprises (AEs) should be conducted at prices that would be charged between independent enterprises. In your case:

- The Indian company provides manpower services to the US company. -

The US company pays 90% of its revenue to the Indian company. This arrangement may raise concerns about whether the Indian company is operating at arm's length.

The high percentage of revenue paid to the Indian company might indicate that the transaction is not at arm's length.

Transfer Pricing Methods The Transactional Net Margin Method (TNMM) is a suitable transfer pricing method for your scenario: -

TNMM is appropriate when the controlled transaction is the provision of services. - This method evaluates the net profit margin of the US company relative to the Indian company.

Other transfer pricing methods, such as the Comparable Uncontrolled Price (CUP) method or the Cost Plus method, might also be applicable.

However, TNMM seems to be the most suitable method given the service-based nature of the transaction.

Revenue Allocation Regarding the revenue allocation, retaining only 5% of the revenue in the US company and shifting the remaining 95% to the Indian company may not be advisable:

- This arrangement could be seen as an attempt to avoid taxes or manipulate profits.

- It may not align with the economic reality of the transaction. A more reasonable approach would be to allocate revenue based on the arm's length principle, considering the functions performed, risks assumed, and assets employed by each company. To ensure compliance with transfer pricing regulations, consider the following:

1. Conduct a detailed transfer pricing study to determine the

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