Tuesday, June 11, 2013

Arms Length Transactions

Let's illustrate transfer pricing situation amongst two inter-company inside the same Group. Business X is incorporated in British Virgin Island and will not be subject to any tax. Business Y, which can be Firm A's subsidiary incorporated in USA, & is subjected to USA corporate tax.
Arms Length Transactions
Business Y is generating profit this financial year, & includes the taxable profit of 100million USA dollar subjected to USA corporate tax. Business X could illegally 'transfer' the taxable profit of Firm Y to Firm X, who is  residing as a tax heaven, exactly where no tax is payable on income earned. To exemplify, Corporation X could charge Business Y a lump sum of 'management fees, 'IT assistance fees' 'royalty fees', & so forth and resulted within the lower in Business Y' taxable income.

Therefore, even though performing audit, we must be conscious with the nature with the inter-company transactions, & to test that the transactions are inside arms length (it generally calls for specialist to execute arms length test). That is to counter strike the shifting pricing concerns described above.

An arms length transactions includes two independent parties and equally is attempting to have the ideal deal feasible.

An additional illustration, in case your mother is selller her 2 year old automobile to you for $7,000 plus the blue book wholesale worth is $14,000, that is definitely not an arms length transactions. Your mother is providing you an incredibly very good deal as an alternative of attempting to have the fair market value worth with the automobile.

In an arms length transactions, the seller of a automobile attempts to have as substantially as you can for the automobile from an independent individual who's striving to have the automobile for the lowest doable price

Related Post