BBC allegedly diverted profits by violating ‘transfer pricing’ rules. What are they?

BBC allegedly diverted profits by violating ‘transfer pricing’ rules. What are they?

Context- The Income-Tax Department surveys at the premises of the British Broadcasting Corporation (BBC) in Delhi and Mumbai on Tuesday (February 14) were conducted in view of the BBC’s “deliberate non-compliance with the transfer pricing rules” and its “vast diversion of profits”, government sources said.

The surveys were looking into “manipulation of prices for unauthorized benefits, including tax advantages”, sources said

(Credits- Wall Street Mojo)

What is transfer pricing?

  • A party may transfer goods or services to another party for a price, which is known as a “transfer price”. However, commercial transactions between different parts of a multinational group may not be subject to the same market forces that shape the relations between two independent firms.
  • According to the I-T Department, “transfer pricing generally refers to prices of transactions between associated enterprises which may take place under conditions differing from those taking place between independent enterprises”.
  • Transfer pricing refers to the “value attached to transfers of goods, services, and technology between related entities, and between unrelated parties that are controlled by a common entity”.

How does transfer pricing work?

  • The I-T Department gives the following example: “Suppose a company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in the open market for 400 rupees.
  • “Had A sold it (the good) direct, it would have made a profit of 300 rupees. But by routing it through B, it (A) restricted it (profit) to 100 rupees, permitting B to appropriate the balance.

What effect does transfer pricing have?

  • According to the I-T Department, the effect of transfer pricing is that the parent company — or a specific subsidiary — tends to produce insufficient taxable income or excessive loss on a transaction.
  • “For instance”, the I-T website says, “profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high-tax countries, and low transfer prices to move profits to subsidiaries located in low-tax jurisdiction.

And what is the “arm’s length arrangement” that the BBC has allegedly violated?

  • Section 92F(ii) of the Income Tax Act, 1961 defines arm’s length price as “a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions”.
  • Section 92C(1) says arm’s length shall be determined by the “most appropriate” among the following methods: “(a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board”.

Conclusion- Transfer pricing reduces the taxation income for the government and hence, needs to be probed. However, at the same time concerns regarding press freedom should also be factored into.

Source- Indian Express

NEWS- BBC allegedly diverted profits by violating ‘transfer pricing’ rules. What are they?

Syllabus- GS-3; Economy