International Transfer Pricing in Services MNCs: A Case of Banking and Insurance Sector

Abstract

One of the important issues in the areas of international taxation, international technology transfer and foreign investment by the MNCs that has been drawing greater attention of tax authorities worldwide is the issue of transfer pricing i.e. the compensation paid for intra-group services to related units of MNCs. Though the initial focus of transfer pricing audit by taxation authority was used to check the abuse of transfer pricing by manufacturing industries, with the growing entry of service MNCs in the global arena, more particularly in the field of financial services such as banking and insurance, where there is lot of scope of tax evasion, taxation authorities are tightening their grips to audit transfer pricing issues with respect to these services. In this direction, this paper captures the concept of transfer pricing while quoting a few evidences of its abuse by MNCs, describes its scope in the area of banking and insurance sectors vis-à-vis underscores the Indian legislation on transfer pricing and describes the firm specific implications so that the concerned tax payers (MNCs) may adopt suitable tax planning approach, maintain proper information and documentation and escape form heavy penalties and harassment. At the end, it has been suggested MNCs should go for Advance Pricing Arrangement (APA), which is under active consideration by the Indian taxation authority. The paper also highlights the advantages of APA system and recommends its inclusion in Indian transfer pricing legislation at the earliest as it will prove beneficial for both taxpayers (MNCs) and taxation authority.

Keywords: Transfer Pricing, Advanced Pricing Arrangements (APAs), Abuse of Transfer Pricing, Arm’s Length Pricing, Services MNCs, Multinational Corporations and Tax Administration, International Transfer Pricing, Intra-Group Services

JEL Classification: E62, F21, F23, H2, H32, H87