PRESENTED BY

What is International taxation? International taxation refers to tax levied on the

cross –border transaction.

Studying Non Resident provisions in a domestic law.

Studying two domestic laws of two different countries.

Concerned with both Direct Taxes and Indirect Taxes.

Why International Taxation?

Globalization

To Define Taxing Rights

To Avoid Double

Taxation Conflicts

Purpose of International Taxation

Taxing Residents

World Wide Income

Taxing Non Residents National Income

CONTENT1. Transfer Pricing2. Objective behind Transfer Pricing 3. Income/Expense having regard to ALP a)Income/Expense to be computed as per ALP b)Allocation/Apportionment of common cost as

per ALP c)Provision of ALP shall not apply when ALP

decrease income or increase losses. 4. International Transaction5. Associate Enterprises6. Deemed Associate Enterprises7. Methods to compute ALP

OBJECTIVE BEHIND TRANFER PRICINGDifferent countries have different rates.

Enable Multinational enterprises to allocate their profit in least tax jurisdiction.

Affect the growth of our country.

T Limited

Indian company

M Limited

Japan Company

ServiceUnrelated party

¥8000

a.¥11000 orb.¥6000

Exchange rate is ¥1=INR49 The income of T Limited is INR 76 lakhs before adjusting above transactionFind out the Net income of M Limited.

EXAMPLE-

Subsidiary

Situation A – When payment to M limited ¥11000 ALP= ¥8000*49=INR392000

Income=INR7600000 (-)INR392000Profit = INR7208000

Income =INR7600000 (-) ¥11000*49=INR539000 Profit=INR7061000(+)downfall in profit=INR147000 INR7208000

Situation B – When payment to M limited ¥6000 ALP= ¥8000*49=INR392000

Income=INR7600000 (-)INR392000Profit = INR7208000

Income =INR7600000 (-) ¥6000*49=INR294000 Profit=INR7306000

Decision- Here the concept of ALP shall not applicable because there a decrease in income after applying ALP.

Income/Expense having regard to ALP

1. Income/Expense to be computed as per ALP

Income from International transaction shall be computed having regard to ALP.

2.Allocation/Apportionment of common cost as per ALP

Allocation or Apportionment of common cost or expense shall be determined having regard to ALP.

3. Provision of ALP shall not apply when ALP decrease income or increase losses.

If after applying ALP there is a decrease in income or increase losses then ALP shall not be applicable.

International Transaction

As per section 92B, International transaction means a transaction entered into between two or more associate enterprise(at least one of which is non resident) for purchase/sale/lease of tangible/intangible property or provision of services or lending borrowing money.

Associate EnterpriseAs per section 92A Associate enterprise mean an enterprise which participates directly or indirectly, in management or control of other enterprise.

Further, if one or more person participate, directly or indirectly, in the management or control of two enterprise, those enterprise are associated enterprise

Deemed Associate Enterprises

1. In first instance A Ltd holding more than 26 % in B Ltd – so A Ltd & B Ltd are Aes

2. In the second instance A Ltd is holding 40 % in B which in turn holds 50 % in C as such arithmetically A holding only 20 % in C Ltd but indirectly through intermediary it owns more than 26 % in C Ltd. So A & C will be AEs

1.A Ltd holding directly more than 26% in B Ltd & C Ltd. Though there is no holding inter-se between B Ltd & C Ltd, by definition A Ltd, B Ltd, & C Ltd are AEs

1.Total book value of assets is 100 lakhs – 51 % is 51 lakhs – loan advanced is more than 51% of the book value . A Ltd and B Ltd are AEs

1.B Ltd has given guarantees more than 10% of the total borrowings of A Ltd . A Ltd and B Ltd are AEs

1.A Ltd exercises control over B Ltd by virtue of power to appoint more than half of the board of directors/members of B Ltd or appoints one or more executive member of the governing board of B Ltd

1. Since Mr.X has appointed more than half of the directors of A Ltd and two executive directors of B Ltd, A Ltd and B Ltd are deemed to be AEs.

1.Since A Ltd provides BLtd with technical know-how for the manufacture of goods , A Ltd and B Ltd are AEs

1.More than 90% of raw material required by A Ltd are purchased from B Ltd . When A Ltd. sells goods to C Ltd the price is influenced by B Ltd. Then, A Ltd & B Ltd are AEs.

1.A Ltd sells goods to B Ltd or person specified by B Ltd. Both cases prices and other conditions are influenced by B Ltd. Then A Ltd & B Ltd are AEs.

1.A Ltd controlled by Mr.P and B Ltd is controlled either by Mr.P or Mr. R or jointly by Mr.P and Mr.R then A Ltd and B Ltd as AEs.

1. A Ltd is controlled by P- HUF and B Ltd is controlled by Mr.R – a member of HUF or a relative of such member then A Ltd and B Ltd as AEs.

1.A firm hold not less than 10% in B firm A & B are AEs.

Methods to compute ALP 1. Comparable Uncontrolled price method

Associate enterpriseUSA

Assessee

Canada

Australia

Without insurance freight=250Without warranty=90

ExportINR 1000 per unitExpor

t

Export

INR 1500 per unit with insurance freight with warrantyALP

INR 1500 per unit(-) insurance 250(-) warranty 90ALP =1160

2. RESALE PRICE METHOD

Associate Enterprises USA

Assessee

3rd party(unrelated)110 lakhs

Purchase(+) Freight(+) Insurance(+) Custom(+) GP Margin= Sale Price

Purchase100 lakhs

Resale

3. COST PLUS METHOD

MARKET

Assessee

Associate Enterprises

Cost SALE

ManipulateDirect cost

Indirect Cost

Not manipulated

Non Associate

4.PROFIT SPLIT METHOD

Step1- Determine the net profit of all associate enterprise engaged in international transaction.

Step2- Evaluate the relative contribution made by each of them with regard toa)Function performedb)Assets employedc) Risk assumed

Step3-Split the combined net profit in relation to relative net contribution.

Step4- The profit so arrived is taken to arrive at ALP in relation to international transaction.

5.Transaction Net Margin Method

MarginNet profit

AssociateInternational Transaction

Uncontrolled transaction

Comparable

Step1- Determine the net profit margin realise by the enterprises from an international transaction entered into with associated enterprise having regard with cost incurred or sale or asset employed or any other base.

Step2-Determine the net profit margin realise by the enterprise from a comparable uncontrolled transaction having regard with same base.

Step3-The net profit margin referred in step2 arising from comparable controlled transaction is adjusted if there any difference between international transaction and comparable uncontrolled transaction.

Step4-ALP=cost in international transaction+ net margin computed in step3.

ROLE OF CMAAdvisory

Roll

Determining Arms length price

Investment

Consultancy