A malaysian-based multinational company, through its indian subsidiary, sells computers it produces in malaysia. The cost of manufacturing each computer is $500. The transfer price allocated by malaysia to its indian subsidiary was $600. The indian subsidiary set the retail price for computers at $700 per unit, while the sale cost was $100 per unit. As a result, the indian subsidiary has zero sales profits and cannot be taxed by the indian tax authorities. The indian tax authorities protested that the transnational corporation intended to transfer profits to malaysia with a lighter tax burden and that the transfer price for this internal transaction should be adjusted to $500. However, the malaysian tax authorities did not agree. In their view, if the transfer price was adjusted to $500, that would be the cost price, which would exempt the malaysian tax authorities from taxation. The indian tax authorities, however, eventually adjusted the transfer price of the transaction, adjusting the taxable profits of the indian subsidiary to us$ 100 per computer and applying income tax accordingly. Initially, the transnational corporation had a carrying profit of us$ 100 in malaysia (transfer price us$ 600 less us$ 500 for manufacturing costs), which had long been taxed by local tax authorities. From the perspective of the corporate group as a whole, its actual profits are only $100, taxed by tax authorities in india and malaysia, leading to double taxation. In accordance with the oecd transfer pricing adjustment principle, when the indian tax authorities lower transfer pricing by $100, the malaysian tax authorities should also reduce taxable profits by $100 following consultations. In fact, however, this provision is futile, as most of the states concerned lack negotiation in this regard. As a result, only one related country reduced transfer pricing, while no other country reduced it accordingly, thus ultimately not eliminating double taxation
Transnational planning should take into account the interests of all countries, such as tax authorities in malaysia and india, and transfer pricing issues between related enterprises often led to disputes between relevant national tax authorities. To correct the problem of transfer pricing violating the principle of fair trade, oecd issued the transfer pricing guidelines in 1979 and has revised them several times. At its core is the requirement that both tax collections follow the principle of fair trade and transfer pricing should be based on acceptable market prices. In the above example, malaysian tncs leave all of their profits in malaysia through tax planning, which is bound to attract opposition from the indian tax authorities, thus subjecting the indian subsidiary to rigorous tax auditing, eventually adjusting its taxable profits and leading to double taxation. If enterprises in india and malaysia had some taxable profits in tax planning, not only would the two countries be able to share tax rights reasonably, but double taxation could also be avoided. Therefore, tax planning for cross-border transactions must take fully into account the tax interests of the countries concerned, and tax authorities should also take fully into account national interests when adjusting transfer pricing
The reasonableness of transfer pricing is essential for the countries concerned to reasonably share tax rights and avoid double taxation. At present, countries, with the exception of the united states, are not yet sufficiently developed to deal with transfer pricing. Most countries are still at the legislative and legislative stages, particularly in asia. Korea was the first country in asia to implement transfer pricing regulations. Subsequently, japan and india implemented the law in 2001, china and thailand in 2002 and malaysia in july 2003. Although singapore does not have a special transfer pricing law, certain sections of its income tax law provide that transfer pricing for transactions between related enterprises should be subject to national laws and regulations
The use of transfer pricing for tax planning and the transfer of profits from high-tax countries to low-tax countries for tax avoidance is one of the important “functionalities” of transfer pricing. However, in addition to tax incentives, transfer pricing has other functions, such as playing an important role in the operation and management of tncs. Thus, transfer pricing between related enterprises must be subject to the relevant national tax laws and regulations; moreover, transfer pricing documents should be made available to the tax authorities as required. First, documents of different content should be submitted to different countries on the basis of local circumstances. This is due to different tax provisions and specific requirements for the declaration of transfer pricing for cross-border transactions. The submission of this document should therefore comply with the requirements of the local tax authorities in order to avoid rigorous tax audits. Second, the documents to be submitted should include a chart of the identity and relationship of the relevant trading party within the enterprise group; analysis of the property use and risk assumptions of the related party; the group's cost-sharing and distribution of profits to the related party; a description of the company's goods, property and services; the methods used to price transfers and their description; a copy of the agreement between the group; accounting data and related companies
