4 min
20-Feb-2025
Transfer pricing documentation refers to the records and reports that multinational companies must maintain to justify the pricing of transactions between their related entities. The Income Tax Act in India mandates that businesses engaging in cross-border transactions with associated enterprises maintain proper documentation to ensure compliance with arm’s length principles. This helps prevent tax avoidance and ensures that profits are not artificially shifted to low-tax jurisdictions. The documentation includes details of related-party transactions, pricing methods, and economic justifications. Proper transfer pricing documentation helps businesses avoid penalties, comply with international tax laws, and provide transparency in financial reporting.
Tax authorities enforce transfer pricing rules to prevent companies from shifting profits to low-tax countries, thereby reducing their overall tax liability. The arm’s length principle ensures that related-party transactions are priced similarly to those between independent entities. Transfer pricing applies to transactions involving goods, services, royalties, loans, and cost-sharing agreements. In India, transfer pricing regulations under the Income Tax Act require companies to maintain extensive documentation and file reports to justify their pricing methods. Non-compliance can result in hefty penalties and adjustments to taxable income.
What is transfer pricing?
Transfer pricing refers to the pricing of goods, services, or intellectual property exchanged between related entities within a multinational corporation. It ensures that transactions between associated enterprises are conducted at market value, preventing profit shifting and tax avoidance. The concept is crucial in international taxation as it determines how income is allocated among different jurisdictions.Tax authorities enforce transfer pricing rules to prevent companies from shifting profits to low-tax countries, thereby reducing their overall tax liability. The arm’s length principle ensures that related-party transactions are priced similarly to those between independent entities. Transfer pricing applies to transactions involving goods, services, royalties, loans, and cost-sharing agreements. In India, transfer pricing regulations under the Income Tax Act require companies to maintain extensive documentation and file reports to justify their pricing methods. Non-compliance can result in hefty penalties and adjustments to taxable income.
Different types of transfer pricing documentation
Transfer pricing documentation consists of various reports and analyses that justify the pricing of transactions between related entities. These documents ensure compliance with tax laws and transparency in financial reporting. The following are the key types of transfer pricing documentation.- Master file – This document provides an overview of the global operations of a multinational enterprise, including its business activities, intangible assets, and transfer pricing policies.
- Local file – It contains specific details of related-party transactions within a country, including pricing methods, agreements, and financial analysis.
- Country-by-country report (CbCR) – Large multinational corporations must submit a country-wise breakdown of income, taxes paid, and business activities to assess global tax distribution.
- Benchmarking studies – These studies compare intercompany transactions with similar independent transactions in the market to ensure compliance with the arm’s length principle.
