FMAccounting.com » TRANSFER PRICING

TRANSFER PRICING IS AN IMPENDING MAJOR TAX CHALLENGE FOR COMPANIES ESPECIALLY MULTINATIONALS

slang — Mon, 02 Nov 2009 08:41:25 +0000

Recently, one of the big four international accounting firm Ernst & Young has conducted a survey on transfer pricing

According to the survey,

There is a dramatic increase in the scope of Transfer Pricing documentation required by governments with penalties imposed more frequently and at higher levels when multinationals get it wrong.
Governments are constantly searching for tax revenues from conducting transfer pricing investigation so as to offset growing budget deficits. Hence, we can see the growing focus on compliance, enforcement and legislations.

For Malaysia, we see:

The introduction of the new Sections 140A and 138C of the Income Tax Act 1967 relating to TP, which referred to the price charged by one part of an organisation for products and services it provides to another.
The local Inland Revenue Board (IRB) has set up a dedicated Multinational Tax Department to focus its efforts and resources on TP matters such as TP audit, compliance, policy and advance pricing arrangement.The specialist resources consist of accountants, economists and those with business and finance backgrounds, and the dedicated resources are expected to increase significantly.

For those accountants who are somehow involve in the transfer pricing system, perhaps it would the right time to review and revamp any loop holes in your company’s transfer pricing methodology otherwise it might come as a surprise to you when Inland Revenue knocks at your door.

Always bear in mind that when implementing transfer pricing system, we should always be consistent in our documentation vide corporate policy or other documentations like other competitors prices,budgets from related companies and others. However, as transfer pricing is pertaining to trade related matters, try alway to adopt a practical approach to what you are doing say for example if you deviate from your present transfer pricing system and give a very much better discount to your related company, try to justify it from the practical customer-supplier standpoint.

WHAT IS ARM’S LENGTH PRINCIPLE AND WHAT ARE THE METHOD TO DETERMINE ARM’S LENGTH

slang — Mon, 19 Oct 2009 10:14:42 +0000

Arm length transaction is a very hot topic in transfer pricing. This article seeks to explain what it means “ at arm length and what are some of the traditional methods to determine “ arm length”

“ At Arm Length” means that a transaction performed within a company must be priced as if carried out between two UNRELATED parties. The price must be based on how much the transaction would cost if it were made in similar conditions on the open market.

Hence, it is important that a company should have a clear and well-defined transfer pricing policy that demonstrate every possible effort has been made to ensure that prices are determined at arm’s length.

Some of the normal methods to determine “arm length are as follows:

(i) Cost Plus(CP).

CP is often used for the sale of finished goods. The price is determined by adding a suitable mark-up to the costs incurred by the seller for raw materials, labour,etc. The mark up is based on the profit received by the company in comparable transactions with unrelated companies, or on profits received by a similar company in comparable transaction

(ii) Comparable Uncontrollable Price(CUP)

This method is a simple comparison. The price is effectively determined by using the price of a similar or comparable transaction between two unrelated companies

(iii) Resale Price(RP)

This method is often used for resale of finished goods. It is found by subtracting a suitable mark-up from the resale price. This mark-up is determined by examining the price for which the finished good would sell to a third party. This is estimated by comparing similar transactions between unrelated parties.

A Comprehensive List of Management Services

slang — Thu, 05 Oct 2006 14:20:17 +0000

CLICK TO THE MAIN PAGE FOR ALL ARTICLES ON SHARED SERVICE CENTRE

Further to my earlier article on management fee/transfer fee and the type of management services to be rendered, append below is a very comprehensive list of management services issued by our Malaysian Custom Authorities who is also in charge of the service tax:

(i) Corporate Affairs Management

coordination of group-wide strategic and business planning;
coordination of group-wide management policies;
monitoring of group-wide performance and coordination;
mergers and acquisition;
privatization proposal/studies; and
feasibility studies.

(ii) Human Resource Management

Management/organization studies;
Compensation structures;
Group key manpower planning and control;
Recruitment of key/senior management staff;
Training planning and administration; and
Group manpower development and planning (at group planning centre)

(iii) Internal Audit

Financial audit;
Management audit;
EDP audit; and
Special investigations.

(iv) Management Information Systems

Group management information services;
Support in EDP System development and implementation;
Office automation;
Outsourcing-contract to do all the work on information system; and
Facilities management-managing of computer department/staff.

(v) Productivity and Quality Improvements

Productivity improvement and control programmes
Quality management;
Customer services enhancement; and
Operational system and control.

(vi) Administrative/Secretarial

( Secretarial services cover services provided by company secretaries, accountants, lawyers, etc)

Accounting;
Liaison with government/other agencies;
Filing of statutory forms and returns;
Maintain and update statutory records;
Preparation of agenda, issue notice of statutory meeting and board resolutions; and
Attending to share registration
- Formulation of marketing plans/strategies;
- Planning/co-ordination of promotion materials;
- Set up sales offices;
- Co-ordinate with lawyers on sale and purchase agreement; and
- Assist in billing as well as debt collection.
- High-rise building/condominiums;
- Business centre/shopping complexes;
- Stadium/sport/exhibition complexes; and
- Recreation/theme parks and gardens.
- Preparation and management of accounting systems and reports;
- Tax administration;
- Budgetary controls;
- Preparation of payments, banking documents and management of cash flow; and
- Monitoring utilization of banking facilities.
- Acting as receivers and liquidators;
- Trustees; and
- Management of estates.
- Feasibility study/investigation and research;
- Recommendation/proposal; and
- Preparation of agreement
- Management facilities;
- Project planning and control;
- Project implementation and administration;
- Coordination with relevant authorities-for approvals, certificates, etc
- Supervision; and
- Regular report on work progress.
- Establish tendering procedures;
- Call for submission of tender quotations;
- Co-ordination with relevant authorities for inspection of sites,etc
- Overall administration of progress and collection of contract works;
- Monitor costing and site expenses; and
- Control and supervision at site.

(vii) Sales & Marketing Management

(viii) Property Management

Financial Management

(x) Asset Management

Project Management Services include the following:

(xi) Preliminary Development Services

(xii) Project Management Services

-appointment of staff/consultants

-secondment of staff;

(xiii) Construction Management Services

Drafting/Formulating Management Services As Part of Management Fee/Transfer Pricing Strategy

slang — Wed, 12 Jul 2006 03:23:05 +0000

If we noticed that many companies charge management fee as part of the transfer pricing strategy. So what type of services can we name so as to able to justify charging management fee?

Append below are examples that you may considered to draft as management services for charging the management fee. The quantum and justification need to be reviewed on a case to case basis by individual company:

Supervise and guide the management and operating activities of the business in ensuring that such activities accord with the overall business policies and strategies of the group;
Marketing and promotion which shall include developing marketing strategies;
Advise the industry and competitive environment, advise and assist on developing the appropriate competitive strategy;
Assist in improving production quality and efficiency;
Provide public relations and other media assistance relating to advertisements and press releases;
Provide public relations and other media assistance relating to advertisements and press releases;
Provide financial advise on treasury activities undertaken by the subsidiaries/related companies and arrange the necessary funding and financial assistance required for purposes of the business and
Provide financial analysis of opportunities and costs.

Refer to another article on a more comprehensive list of management services.

Transfer Pricing Systems :Methods & Selection(Part C)

slang — Mon, 13 Mar 2006 12:19:08 +0000

a) Comparable Uncontrolled Price (CUP):- This method seeks to determine the ALP by comparing the controlled transaction with the uncontrolled transaction in relation to property transferred or services provided. This method is basically applied to concerns engaged in the manufacturing and selling of the product and hence to be applied to manufacturers.

Typical transactions in respect to which CUP may be adopted:-

Transfer of goods
Provision of services
Intangibles
Loans, provision of finance

The Comparable uncontrolled price method shall be determined in the following manner:-

Identify the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction
Such price is adjusted to account for differences, if any, between the international transaction and the uncontrolled transaction or between the enterprises entering into such transactions, which could materially affect the price in the open market
The price so adjusted is taken to be the arm’s length price in relation to the international transaction
The arm’s length price is compared with the price charged in the international transaction
If the price charged in the international transaction is lower than the arm’s length price or the price paid in the international transaction is higher than the arm’s length price then an adjustment is to be made to the price charged or paid in the international transaction by the amount of such variance

b) Resale Price Method:- This method evaluates whether the gross margin charged in the controlled transaction is at arms length by comparing with uncontrolled transactions. This method evaluates the process of functions performed rather than the products. The resale price is generally applied in the case where the reseller does not add any substantial value to the tangible property and no physical alteration in product is done. The Resale price method shall be determined from the following:-

Identify the international transaction of purchase of property or services
Identify the price at which such property or services are resold or provided to an unrelated party
Deduct the normal gross profit margin derived by the enterprise from the resale price of such property or services. The normal gross profit margin is that margin which the enterprise would earn from purchase of the similar product from an unrelated party and the resale of the same to another unrelated party.
Deduct also expenses incurred in connection with the purchase of goods from the price so arrived
Adjust the prices so computed for the differences between the uncontrolled transaction and the international transaction. These differences could be functional and other differences including differences in accounting practices. Further these differences should be such as would materially affect the amount of gross profit margin in the open market
The adjusted price arrived at is the arm’s length price for the property purchased or services obtained
Substitute the arm’s length price for the price charged in the international transaction and make adjustments to the income returned accordingly.

c) Cost Plus Method:- Under this method an appropriate mark-up would be added to the cost incurred by the supplier or service provider. The price that is arrived at after considering the mark-up method would be considered as Arms Length Price. This method probably is most useful where semi-finished goods are sold between related parties, where related parties have concluded joint facility agreements or long term buy-&-supply arrangements or where controlled transaction is the provision of services.

Typical transactions where cost plus method maybe adopted are:-

Provision of services
Joint facility arrangements
Transfer of semi-finished goods
Long term buying and selling arrangements.

The Cost Plus Method shall be determined from the following:

The direct and indirect cost of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise
The amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transaction, is determined
The normal gross profit mark-up referred to in the above sub-clause is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transaction, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market
The costs referred to in the first sub-clause are increased by the adjusted profit mark-up arrived at under the third sub-clause
The sum so arrived at is taken to be an arm’s length price in relation to the supply of the property or provision of services by the enterprise.

d) Profit Split Method:- A transactional profit method that identifies the combined profit to be split for the Associated Enterprises from a controlled transaction and then splits those profits between the AEs based upon an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arms length. This method is applicable only if it involves transfer of unique intangibles or multiple international transactions, which are so interrelated that they cannot be evaluated separately for the purpose of determining the arms length of any one transaction.

The following steps are to be taken under profit split method :-

The first step is to determine the total profit earned by the parties from a controlled transaction. The profit split method allocates the total integrated profits related to a controlled transaction, and not the total profits of the group as a whole. The profit to be split is generally the operating profit, before the deduction of interest and taxes. In some cases, it may be appropriate to split the gross profit.
The second step is to split the profit between the parties based on the relative value of their contributions to the non-arm’s length transactions, considering the functions performed, the assets used, and the risks assumed by each non-arm’s length party, in relation to what arm’s length parties would have received.

d) Transaction Net Margin Method:- This method primarily focuses on net margin released by the Associate Enterprise (foreign parties) in their controlled transaction with that of uncontrolled transaction. The net margin is not a derivative of a product alone, but derivative of various process viz; nature of the market, cost practice followed by the company, the presence of intangibles etc.

Typical kinds of transactions where the transactional net margin method may be used are:-

Provision of services
Distribution of finished products where resale price method cannot be adequately applied
Transfer of semi-finished goods.

The following steps are to be taken under Transaction Net Margin Method:-

Identify the net profit margin realized by the enterprise from an International transaction. The net profit margin may be computed in relation to costs incurred or sales effected or assets employed or any other relevant base
Net profit margin from a comparable uncontrolled transaction is identified
This net profit margin is adjusted to take into account the differences if any between the international transaction and the comparable uncontrolled transaction. The differences should be those that could materially affect the net profit margin in the open market
The adjusted net profit margin is taken into account to arrive at the arm’s length price in relation to the international transaction.

Methods Considered:-

Since the assessee enterprise is engaged in manufacturing and selling of the products, the methods Profit Split Method and Resale Price Method are not relevant for the assessee enterprise for the determination of ALP because:-

Resale price method as mentioned above is mainly concerned with the resale of the product without there being any addition of substantial value to the product nor there being any alteration in the product. Now, as the assessee enterprise is mainly engaged in the manufacturing business this method is of no relevance.
Profit Split Method is basically applicable where intangibles are involved or multiple international transactions are involved which are so interrelated that they cannot be evaluated separately for the purpose of determining the arms length of any one transaction. In our case as there are no intangibles involved and also that each transaction is separately identifiable, this method also holds no importance for us in determining the ALP.

Therefore, we are left with basically only three methods of pricing for the purpose of determination of ALP i.e.:-

Comparable Uncontrolled Price Method
Cost plus method
Transaction Net Margin Method,

Factors that should be taken into account for selecting the Most Appropriate Method of the above three:-

Nature and class of international transactions
Class or classes of associated enterprises and the functions performed by them taking into account the assets employed or to be employed and risks assumed by such enterprises
Availability, coverage and reliability of data. For instance, data relating to transactions entered into by the enterprise itself would be more reliable than the data relating to transactions entered into by third parties
The degree of comparability
The extent to which reliable and accurate adjustments can be made to account for the difference between the transactions.

Transfer Pricing System: Definitions & Relevant Acts (Part B)

slang — Mon, 13 Mar 2006 12:13:01 +0000

What we have below

are the terms and definitions used in Transfer Pricing.
the relevant acts pertaining to Transfer Pricing in India.
a sample report from an accountant to be furnished under Section 92E

Transfer Pricing Regulations: are applicable to all enterprises that enter into an “International Transaction” with an “Associated Enterprise“. The objective is to arrive at a comparable price, as available, in relation to transactions with unrelated parties in open market conditions and is known as the “Arm’s Length Price”.

“Associated Enterprise”: The basic criterion to determine an “Associated Enterprise” is the participation in management, control or capital (ownership) of one enterprise by another enterprise. The participation may be direct or indirect or through one or more intermediaries. The concept of control extends not only to control through holding shares or voting power or the power to appoint the management of an enterprise, but also through debt and control over various components of the business activity such as control over raw materials, sales and intangibles.

Section 92A (1) of the Income Tax Act, 1961 defines “Associated Enterprise”, in relation to another enterprise as one which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
“International Transaction”: An “International Transaction” is essentially a cross border transaction between two or more associated enterprises in any sort of property, tangible or intangible, or in the provision of services, lending of money, etc. At least one of the parties to the transaction must be a non-resident entering into one or more of the following transactions:

Purchase, sale or lease of tangible or intangible property,
Provision of services,
Lending or borrowing of money,
Any transaction having a bearing on profit, income or assets.
Mutual agreement between “associated enterprises” for allocation / apportionment of any cost, contribution or expense.

“Arm’s Length Price”: The Transfer Pricing Regulations have provided that any income arising from an international transaction between “associated enterprises shall be computed having regard to the “arm’s length price”, which is the price that would be charged in the transaction if it had been entered into by unrelated parties in similar conditions.
Section 92 – Computation of income from international transaction having regard to arms length price

(1) Any income arising from an international transaction shall be computed having regard to the arms length price.
Explanation.For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arms length price.
(2) Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arms length price of such benefit, service or facility, as the case may be.
(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into.]
Section 92 D – Maintenance and keeping of information and document by persons entering into an international transaction

(1) Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed.
(2) Without prejudice to the provisions contained in sub-section (1), the Board may prescribe the period for which the information and document shall be kept and maintained under that sub-section.
(3) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof, as may be prescribed under sub-section (1), within a period of thirty days from the date of receipt of a notice issued in this regard:
Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days

Section 92E – Report from an accountant to be furnished by persons entering into international transaction

Every person who has entered into an international transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form ( Form 3CEB) duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.
Rule 10D – Information and documents to be kept and maintained
(1) Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely:
(a) a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises;
(b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions have been entered into by the assessee, and
ownership linkages among them;
(c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted;
(d) the nature and terms (including prices) of international transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction;
(e) a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction;
(f) a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions entered into by the assessee;
(g) a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions;
(h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction;
(i) a description of the methods considered for determining the arms length price in relation to each international transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case;
(j) a record of the actual working carried out for determining the arms length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions;
(k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arms length price;
(l) details of the adjustments, if any, made to transfer prices to align them with arms length prices determined under these rules and consequent adjustment made to the total income for tax purposes;
(m) any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arms length price.
(2) Nothing contained in sub-rule (1) shall apply in a case where the aggregate value, as recorded in the books of account, of international transactions entered into by the assessee does not exceed one crore rupees :
Provided that the assessee shall be required to substantiate, on the basis of material available with him, that income arising from international transactions entered into by him has been computed in accordance with section 92.
(3) The information specified in sub-rule (1) shall be supported by authentic documents, which may include the following:
(a) official publications, reports, studies and data bases from the Government of the country of residence of the associated enterprise, or of any other country;
(b) reports of market research studies carried out and technical publications brought out by institutions of national or international repute;
(c) price publications including stock exchange and commodity market quotations;
(d) published accounts and financial statements relating to the business affairs of the associated enterprises;
(e) agreements and contracts entered into with associated enterprises or with unrelated enterprises in respect of transactions similar to the international transactions;
(f) letters and other correspondence documenting any terms negotiated between the assessee and the associated enterprise;
(g) documents normally issued in connection with various transactions under the accounting practices followed.
(4) The information and documents specified under sub-rules (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F:
Provided that where an international transaction continues to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature or terms of the international transaction, in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under sub-rules (1) and (2) shall be maintained bringing out the impact of the change on the pricing of the international transaction.
(5) The information and documents specified in sub-rules (1) and (2) shall be kept and maintained for a period of eight years from the end of the relevant assessment year.

Sample Report From An Accountant to be furnished under Section 92E
FORM NO. 3CEB

[See rule 10E]
Report from an accountant to be furnished under section
92E relating to international transaction(s)
1. *I/We have examined the accounts and records of _______________________________________________ (name and address of the assessee with PAN) relating to the international transactions entered into by the assessee during the previous year ending on 31st March, ______________
2. In *my/our opinion proper information and documents as are prescribed have been kept by the assessee in respect of the international transaction(s) entered into so far as appears from *my/our examination of the records of the assessee.
3. The particulars required to be furnished under section 92E are given in the Annexure to this Form. In *my/our opinion and to the best of my/our information and according to the explanations given to *me/us, the particulars given in the Annexure are true and correct.
**Signed
Name :
Address :
Membership No. :
Place : _____________
Date : _____________
Notes :
1. *Delete whichever is not applicable.
2. **This report has to be signed by -
(i) a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949); or
(ii) any person who, in relation to any State, is, by virtue of the provisions in sub-section (2) of section 226 of
the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as an auditor of companies registered
in that State.
ANNEXURE TO FORM NO. 3CEB
Particulars relating to international transactions required to befurnished under section 92E of the Income-tax Act, 1961
PART A

Transfer Pricing System: Core Documentation File (Part A)

slang — Mon, 13 Mar 2006 12:06:52 +0000

India is one of those countries that view Transfer Pricing very seriously, at least amongst Asia Pacific countries. India requires an Annual Certification to accompany the auditor report. As we are fully aware that India is opening up its economies. The authorities would like to ensure that there is no unnecessary hanky-panky by investors to siphon foreign exchange from its country. Hence,the setting up proper transfer pricing methodology/documentation to comply with the authorities is indeed one of the hot topics amongst financial controllers.

Transfer pricing regulations started in Year 2000. As India’s fiscal year ends on 31st March, hence Indian subsidiaries with international links felt its impact in its submission of the annual financial statement ending 31st March 2001. Indian Tax authorities will need proof or evidence in order to believe that international transactions with their domestic organization are above board. Thus, if a group of companies has Indian subsidiaries, it is essential that their Indian subsidiaries need to keep records, registers, systems and general information to justify transfer pricing with its international counterpart.

In establishing the transfer pricing of the Company, it is essential that a Core Documentation File should be set up in the event of dispute or query from the Indian Inland Revenue. A typical TP Core Documentation File should include the profile of the international /multinational group, justification of the transfer prices with its function vs risk analysis, records , registers or systems (refer to details).

Let’s discuss more in detail what’s in the Core Documentation File :

(a) the profile of the International /multinational group like:

1. Multinational Group Promoters

2. Areas of Activity

3. Products Manufactured

4. Countries Operated

5. Group Capital

6. Group Turnover

7. Head office Address

8. Reason for Investment in India

9. Relationship with Indian Co

10. Place of Incorporation

(b) documentation of justifying your transfer pricing vide

Function and Risk analysis approach which is as follows:

Understanding the Enterprise Operations

A. Indian, enterprise operations

B. The operations of the associated enterprises.

C. The relationship between the Indian enterprise and its Associated enterprises

D. Role of each entity

E. Review of annual reports

F. Review of articles about the assessee from trade publications and other sources

G. Any reports of Financial Institutions, Credit agencies

H. Review of internal publications, viz. Corporate Brochure. Profile etc.

I. Review of legal entity and functional organization charts

J. Review of minutes of meetings of the following: Board of directors; Shareholders: Committees reporting to the board of directors

K. Review customs entry documents

L. Review of sales catalogs, brochures, and pamphlets

M. Identification of presence of Intangible

N. Review of Fixed Assets register

O. Identification of ownership through registration

P. Any reports indicating the brand value from the Industry Journals.

Q. Reviewing industry publications

R. Reviewing industry guidelines contained in the various handbooks

S. Are the associated enterprises manufacturing the same or similar products ?

T. Are the associated enterprises using the same or similar manufacturing intangibles? If so, were the manufacturing intangibles sold or licensed?

U. Is there a cost sharing agreement?

V. Are marketing intangibles being used to market the product?

W. What members of the controlled group developed the marketing intangibles?

X. What members of the controlled group advertise?

2. Functional Analysis

1. A functional analysis identifies the economically significant activities performed in connection with the transaction. An economically significant activity is one that, at arm’s length, materially affects the following:

A. The price charged in a transaction

B. The profits earned from a transaction

2. A functional analysis involves determining the following:

A. What functions were performed by the transacting parties concerning the transaction? B. Who performed the functions?

C. When were the functions performed?

D. Where were the functions performed?

E. How were the functions performed?

F. Why were the functions performed?

G. What intangibles were employed in the performance of functions?

H. How were intangibles employed in the performance of functions?

I. Why was the transaction structured the way it was?

3. A functional analysis involves tracing the flow of products and services within the organization. Delivering products to a market generally involves various stages. These may include the following:

A. Conceptualization

B. Research and development

C. Manufacturing

D. Testing

E. Marketing

F. Sales

G. Internal usage

4. In performing a functional analysis, additional considerations include:

A. Did the parent or another affiliate sell product in the subsidiary’s market: Before the subsidiary’s formation? After the subsidiary’s formation? If sales were to unrelated distributors, what resale margins did the unrelated distributors earn?

B. Does the subsidiary actively perform sales or marketing functions?

C. Does the subsidiary rely on a distribution network that was previously established by the parent?

D. Did the subsidiary develop new customers for the product it purchases from the parent?

E. Have sales of the parent’s product in the subsidiary’s market increased following the subsidiary’s formation?

F. Has the subsidiary entered into any exclusive or nonexclusive distribution agreements with the parent?

G. Are there any intangibles associated with the parent’s sales of products to the subsidiary?

H. Has the subsidiary entered into any license agreements with the parent?

Risk Analysis

A. Whether the assessee has the financial capacity to fund losses that may occur because having assumed a particular risk?

B. Does the assessee have control over the business activities that involve a particular risk?

C. Is the actual conduct of the transacting controlled taxpayers consistent with the contractual terms?

D. Are the risks assumed commensurate with the potential economic benefit of the controlled transaction? At arm’s length, the transacting party that can realize the benefit generally bears the risk.

E. Is the assessee engaged in the business activity to which the risk relates?

2. Examples of risks include the following:

A. Market risks including fluctuations in costs, demand, prices and inventory levels

B. Risks associated with the success or failure of research and development activities

C. Financial risks including fluctuations in foreign currency rates of exchange and interest rates

D. Credit and collection risks

E. Product liability risks

F. General business risks relating to the ownership of property, plant and equipment.

Functional Analysis of Manufacturing Administrative and Marketing Functions

List of Functions that needs to be analysed

Functional analysis of manufacturing activity

1. Develops products. Y/N

2. Develops manufacturing process and know-how. Y/N

3. Develops product specification plant design. Y/N

4. Designs manufacturing plant, machinery, and equipment. Y/N

5. Purchases capital equipment. Y/N

6. Supervises construction of manufacturing plants and other buildings. Y/N

7. Determines raw material and other supplies needed. Y/N

8. Develops source of raw material purchases. Y/N

9. Purchases raw material. Y/N

10. Warehouses raw materials and supplies. Y/N

11. Develops raw material flow technique. Y/N

12. Controls flow of raw materials. Y/N

13. Arranges for freight and insurance on purchases. Y/N

14. Plans productions schedules and output. Y/N

15. Co-ordinates production and selling. Y/N

16. Develops cost standards. Y/N

17. Develops quality control standards. Y/N

18. Performs quality control functions. Y/N

19. Manufactures components. Y/N

20. Manufactures other raw materials. Y/N

21. Manufactures finished goods. Y/N

22. Does manufacture engineering. Y/N

23. Determines factory personnel needs. Y/N

24. Hires and trains factory personnel. Y/N

25. Supervises the different manufacturing operations. Y/N

26. Performs maintenance of factory buildings, grounds and equipment. Y/N

27. Packages and labels products. Y/N

28. Plans investment in plant and equipment and handles financial needs of manufacturing functions. Y/N

Functional analysis of general, administrative and selling functions

1. Develops financial needs and budgets for the group. Y/N

2. Plans investments and makes investment decisions. Y/N

3. Develops overall marketing strategy. Y/N

4. Plans, co-ordinates and supervises market research. Y/N

5. Performs market research. Y/N

6. Determines advertising and marketing policy. Y/N

7. Supervises advertising and marketing. Y/N

8. Determines the needs for general, administrative and selling personnel. Y/N

9. Hires personnel. Y/N

10. Develops training materials. Y/N

11. Supervises training of personnel. Y/N

12. Trains general, administrative and selling personnel. Y/N

13. Determines compensation of personnel. Y/N

14. Determines pricing and pricing policy. Y/N

15. Establishes credit terms. Y/N

16. Develops advertising formats and translations. Y/N

17. Determines media in which advertising is to be placed and places advertising Y/N

18. Plans and develops TV commercials. Y/N

19. Plans sales promotion and develops promotional materials (eg, design point of display advertising, engineers manufacturing design and manufactures displays). Y/N

20. Plans trade conventions and shows. Y/N

21. Supervises sales force and does customer contact. Y/N

22. Designs and develops packaging material. Y/N

23. Manufactures packaging material. Y/N

24. Designs material for and develops catalogues. Y/N

25. Co-ordinates production schedules with sales. Y/N

26. Purchases finished goods. Y/N

27. Supervises purchasing and warehousing of finished goods. Y/N

28. Warehouses finished goods. Y/N

29. Performs inventory control. Y/N

30. Ships finished goods. Y/N

31. Provides insurance coverage. Y/N

32. Warrants product. Y/N

33. Handles patent and trademark protection. Y/N

34. Assumes inventory risk. Y/N

35. Assumes credit risk. Y/N

36. Develops accounting systems and software. Y/N

37. Maintains accounting records. Y/N

38. Performs tax planning and administration. Y/N

39. Handles customers’ complaints. Y/N

40. Handles billing and collection. Y/N

41. Handles government matters. Y/N

42. Prepares statistical data and financial reports. Y/N

Functional analysis of marketing function

1. Supervises marketing activities. Y/N

2. Develops new promotional themes for advertising; promotion and to whom such services are provided. Y/N

3. Develops training material and trains personnel. Y/N

4. Develops marketing plans for new products and guidelines for marketing. Y/N

5. Co-ordinates the execution of planned marketing foreign subsidiaries. Y/N

6. Approves product authorization. Y/N

7. Designs and develops packaging material to implement strategy and effort. Y/N

8. Plans and develops TV commercials. Y/N

9. Plans and develops advertising formats, and determines be used such as magazines, newspapers, etc. Y/N

10. Co-ordinates production schedules with sales. Y/N

11. Plans and develops other promotional material such as brochures, catalogues, display advertising, etc. Y/N

12. Plans trade conventions and shows. Y/N

13. Determines personnel needs. Y/N

14. Establishes compensation and other personnel incentives Y/N

15. Determines pricing and pricing policy and co-ordinate foreign subsidiary. Y/N

16. Establishes credit terms. Y/N

17. Responsible for customer contact. Y/N

18. Supervises sales force. Y/N

19. Performs market research and develops new market Y/N

20. Identifies need for product modification. Y/N

21. Warehouses finished product. Y/N

22. Ships product and provides insurance coverage. Y/N

23. Warrants product. Y/N

Records which need to be kept :

1. Develops financial needs and budgets for the group. Y/N

2. Plans investments and makes investment decisions. Y/N

3. Develops overall marketing strategy. Y/N

4. Plans, co-ordinates and supervises market research. Y/N

5. Performs market research. Y/N

6. Determines advertising and marketing policy. Y/N

7. Supervises advertising and marketing. Y/N

8. Determines the needs for general, administrative and selling personnel. Y/N

9. Hires personnel. Y/N

10. Develops training materials. Y/N

11. Supervises training of personnel. Y/N

12. Trains general, administrative and selling personnel. Y/N

13. Determines compensation of personnel. Y/N

14. Determines pricing and pricing policy. Y/N

15. Establishes credit terms. Y/N

16. Develops advertising formats and translations. Y/N

17. Determines media in which advertising is to be placed and places advertising Y/N

18. Plans and develops TV commercials. Y/N

19. Plans sales promotion and develops promotional materials (eg, designpoint of display advertising, engineers manufacturingdesign and manufactures displays). Y/N

20. Plans trade conventions and shows. Y/N

21. Supervises sales force and does customer contact. Y/N

22. Designs and develops packaging material. Y/N

23. Manufactures packaging material. Y/N

24. Designs material for and develops catalogues. Y/N

25. Co-ordinates production schedules with sales. Y/N

26. Purchases finished goods. Y/N

27. Supervises purchasing and warehousing of finished goods. Y/N

28. Warehouses finished goods. Y/N

29. Performs inventory control. Y/N

30. Ships finished goods. Y/N

31. Provides insurance coverage. Y/N

32. Warrants product. Y/N

33. Handles patent and trademark protection. Y/N

34. Assumes inventory risk. Y/N

35. Assumes credit risk. Y/N

36. Develops accounting systems and software. Y/N

37. Maintains accounting records. Y/N

38. Performs tax planning and administration. Y/N

39. Handles customers’ complaints. Y/N

40. Handles billing and collection. Y/N

41. Handles government matters. Y/N

42. Prepares statistical data and financial reports. Y/N

1. Supervises marketing activities. Y/N

2. Develops new promotional themes for advertising ;promotion and to whom such services are provided. Y/N

3. Develops training material and trains personnel. Y/N

4. Develops marketing plans for new products and guidelines for marketing. Y/N

5. Co-ordinates the execution of planned marketing foreign subsidiaries. Y/N

6. Approves product authorization. Y/N

7. Designs and develops packaging material to implementstrategy and effort. Y/N

8. Plans and develops TV commercials. Y/N

9. Plans and develops advertising formats, and determines be usedsuch as magazines, newspapers, etc. Y/N

10. Co-ordinates production schedules with sales. Y/N

11. Plans and develops other promotional material such asbrochures, catalogues, display advertising, etc. Y/N

12. Plans trade conventions and shows. Y/N

13. Determines personnel needs. Y/N

14. Establishes compensation and other personnel incentives Y/N

15. Determines pricing and pricing policy and co-ordinate foreign subsidiary. Y/N

16. Establishes credit terms. Y/N

17. Responsible for customer contact. Y/N

18. Supervises sales force. Y/N

19. Performs market research and develops new market Y/N

20. Identifies need for product modification. Y/N

21. Warehouses finished product. Y/N

22. Ships product and provides insurance coverage. Y/N

23. Warrants product. Y/N

2 (a) Economic and market analysis Product;-

Forecast and budgets

Costing Other financial estimates like interest, exchange difference etc. Analysis of international prices, margins and costs with local prices, margins and costs and variance analysis.

Division:-Forecasts and budgets w.r.t machines capacity, demand forecasted, manpower availability for each division etc.Forecasts and budgets w.r.t machines capacity, demand forecasted, manpower availability for each division etc.

SUPPORTIVE RECORDS

3(a) Official Publications, reports, studies and data from the government of the Associated Enterprise like eg.:- If the company is dealing in computers then:- PC Quest Market

(b)research, study and technical publication by an International/National Institution involving graphs and pie diagrams as compiled by the Organisations, or any other research body.

Published accounts of the Associated Enterprise with whom the transaction is entered into.

Agreements and contracts with Associated Enterprise and also with non Associated Enterprise for similar products for the purpose of comparability.

Correspondences with the Associated Enterprise concerning price negotiations, if any with proofs like letters of correspondence. General documents like invoices, bill of lading, delivery orders and vouchers.

Records of assumptions, policies and price negotiations with the Associated Enterprise (Foreign parties)

Assumptions in pricing the product as to the demand forecasted the markets to be catered, the level of competition, the entry strategy etc.Policies with such as penetration policy or aggressive pricing policy based on the above assumptions.Price negotiation documents, correspondence, if any like the agreements, contracts etc.

OTHER INFORMATION

Whether a similar product is manufactured in India? Y/N

If yes, by whom? Y/N

At what cost? Y/N

What are the differences & their effect on price?

What is the selling price in India?

What is it outside India?

Whether the Indian concern is selling similar product in India? Y/N

If yes, to whom? Y/N

What is the cost of production?

What is the selling price in India?

Whether the Indian concern is selling similar product outside India? Y/N

If yes, to which countries and on what terms? What is the selling price abroad?

Whether the AE is buying any product of similar nature from India from any other person or from any other country? Y/N If yes, at what price? If comparable with the controlled transaction then terms of such uncontrolled transaction.

What is the purpose to which the AE puts the purchased goods?

What is the margin of profit on resale?

What is the source of the goods supplied by AE to us?

What is his cost?

What is his margin of profit?

GENERAL INFORMATION·

Specific Characteristics of the property.e.g.:- its purpose, significance, description.

Functions performed (As per Annexure)

· Assets employed

· Risks assumed (As per Annexure)

· Manner of sharing the risk and benefit (What is the %, terms & conditions, if any).

· Size of the market

· Geographical Location.

· Laws and government orders like the price regulations, the quantity allowed to be sold, quotas if any etc.

· Cost of labour in both the countries (wages paid to them skilled & unskilled)

· Cost of capital in both the countries.

· Wholesale or retail market

· Economic development (Whether developing or developed, capital or labour oriented economy).