Question

QUESTION TWO (05 Marks) The transfer pricing is the process for setting price of a transaction between two entities that are part of the same group of companies. The dilliculty in monitoring and taxing such transactions is that they do not take place on an open market. Whereas a commercial transaction between two independent companies "uncontrolled transaction" on competitive market should rellect the best or both companies, transactions between alliliated companies "controlled transactions are more likely to be made in the best interest of the global corporation. It can be in the interest of the global corporation to make higher profits in lower-laxed jurisdictions and lower profits in higher taxed ones, as a means of reducing its overall tax bill. Required: For each of the dodging practice, briclly explain how does the Income tax Act 2001 and Tax Administration (Transfer pricing) Regulations, 2018 address the four tax dodging practices by MNEP 6.c. Taking a trip to Mauritius. Thinning on top. The Swiss Role and Going Dutch).

Answer 1

Answer to the above question:

Four tax dodging practices that maybe adopted by MNE under the income Tax act 2001 and tax administration ( transfer pricing ) regulations, 2018 are mentioned below:

1) tax sheltering/ profit shifting:- Profit shifting is a uncontrolled strategy in many multinational corporations, in which profits derived by the entity are pushed to sister concerns in low tax jurisdictions. By doing this, the profits are reduced.

2) IP structuring:- Under this strategy, the business is structured in such a way that all valuable patents and technical know-how are owned by a subsidiary in a low tax jurisdiction. In its simplest form, all IP rights of the MNE are centralised in an entity registered in a tax haven. This reduces profit and thus the tax incidence.

3) Exploiting international differentials:- MNE as integrated entities exploit international differentials and generate integration economies by setting transfer prices that are unlikely to be the same prices as the arms length parties would negotiate.

4) debt shifting:- when a company borrows money from other company (tax heaven) in spite of not being in need of money and pays interest on this loan to that other company(tax heaven) then this interest payments made by the company are tax deductible. So it effectively reduce the profit.