A Guide for FY 2023–2024 on Tax Audit for Transfer Pricing

Closing date: October 31, 2024

Businesses must comprehend the complexities of tax audit and how it affects their financial statements as the deadline for submitting tax audit reports for transfer pricing draws near. In this blog article, we will explore the topic of tax audit for transfer pricing, its importance, and the actions that must be performed to guarantee regulatory compliance.

How Does Transfer Pricing Work?

The rates at which products, services, or intangible assets are transferred between organizations that are connected, such as a parent business and its subsidiary or two subsidiaries that are part of the same parent company, are referred to as transfer pricing. The main goal of transfer pricing is ensuring that the prices are arm's length — that is, similar to what would be charged between unrelated parties.

Why Is a Tax Audit Required for Transfer Pricing?

In order to stop multinational corporations from manipulating prices to avoid paying taxes, the Indian government has implemented transfer pricing restrictions. One important part of these laws is the tax audit for transfer pricing, which ensures that the correct amount of tax is paid and helps to identify any anomalies in the transfer prices.

Who Must Submit a Transfer Pricing Tax Audit Report?

The following organizations must submit a transfer pricing tax audit report:

• Businesses whose foreign transactions total more than ₹1 crore
• Businesses whose specified domestic transactions total more than ₹20 crore
• Businesses having annual sales over ₹100 crore

What Are the Main Elements of a Transfer Pricing Tax Audit Report?

Typically, a tax audit report on transfer pricing consists of the following elements:

• An in-depth explanation of the foreign transactions or certain local transactions
• The procedure for figuring out the arm's length pricing
• A comparison between regulated and uncontrolled transactions
• The pricing range's arm's length calculation
• The transfer price policy documents

How to Make Sure Your Tax Audit for Transfer Pricing Is Compliant

Businesses should take the following actions to ensure compliance with the tax audit for transfer pricing:

• Keep thorough and precise records: Maintain detailed and accurate documentation of all international and designated domestic transactions, including the costs incurred and the methodology employed to ascertain the arm's length price.
• Perform a comprehensive comparative analysis: To determine which similar uncontrolled transactions are most suited, perform a detailed comparison study.
• Establish the pricing range at arm's length: Using a valid transfer pricing technique, such as the Transactional Net Margin Method (TNMM) or the Comparable Uncontrolled Price (CUP) method, ascertain the arm's length price range.
• Record the policy on transfer pricing: Document the transfer pricing policy, along with the comparability analysis and the method for calculating the arm's length price.
• Submit the tax return and timely audit report: Submit the tax audit report by October 31, 2024, at the latest.

Conclusion

An essential part of Indian tax laws is the tax audit for transfer pricing, and businesses must ensure they are following the rules to avoid penalties or legal actions. By following the procedures described above and keeping accurate and thorough records, businesses can ensure they are compliant with the tax audit for transfer pricing.

Leave a reply