With increasing cross-border trade, the significance of transfer pricing is growing at a rapid pace. In this article, Aditya Shrivastava, Marketing Manager at iPleaders, talks about why there is a dearth of talent in this field of practice, and the increasing career opportunities in transfer pricing practice.
In an article by TechCircle, Reduce Data Inc’s founder Asif Ali says, “India has a mature ecosystem, but it has become very expensive to operate here. You can run a great global startup from Chennai or Bangalore today because the internet has done away with the boundaries that existed. But if the costs in Bangalore is as high as the Silicon Valley and if the retention of people is harder, it is not surprising to see many more companies choosing to move to US to run a company in the Silicon Valley itself.”
However, one cannot blame the high costs of operations alone. We are witnessing a time where India is coming at par with the rest of the world in terms of international structuring of the companies. There are numerous small budgeted startups like these which have gone truly international and there are several others coming up.
With the globally changing scenario and international trade growing faster than ever, international structuring is not restricted to large companies only. The situation has undergone a sudden boom as technology is playing a vital role to make the collaboration easy. The business section of the newspapers sees more and more businessmen collaborating each day.
Social media is an add on too. You can witness businesses increasing massively on platforms like Google, LinkedIn, Facebook etc., to continuously market themselves, or you can also see a dozen startups earning money from Freelancer.com, Fiverr, 99designs, YouTube and thereby make international sales.
However, what most of these newly venturing businessmen fault at is understanding one of the most crucial elements of this exercise – International Taxation. It is indeed revolutionary that today, a relatively small company or a startup can begin a business that squarely caters to an international rather than a local clientele, which cuts across services, manufacturing, and even agriculture. However, what does this mean for lawyers? The answer to this question might make or break careers of many.
So what is transfer pricing?
Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price.
Transfer pricing can be used as a profit allocation method to attribute a multinational corporation’s net profit (or loss) before tax, to countries where it does business. Transfer pricing results in the setting of prices among divisions within an enterprise.
So what are the risks and benefits involved in transfer pricing?
There are plethora of benefits of transfer pricing, however, there are equal risks involved and that is exactly where the role of the lawyers comes into play. I will try to discuss some of them here.
What benefits are associated with transfer pricing?
- Bringing down income tax in countries with greater slabs by overpricing goods/services in countries with a relatively lesser tax slab. Needless to say, this is an effective technique to increase profits.
- Transfer pricing also effectuates reduction in the duty costs by sending shipments to high tariff countries at minimal prices so that the associated duty base with the said transactions is reduced.
- As a lawyer, you are entitled to a lot of remuneration as it takes special skill-set and knowledge to effectuate transfer pricing and accounting systems.
What are the risks associated with Transfer Pricing?
- There is a constant policy fluctuation between the organizational division managers.
- Transfer pricing is a bit dicey for estimating service transfers, as setting an estimate cost on services is situational.
- Transfer pricing is complicated and time consuming.
Why should you as a lawyer be interested in Transfer pricing?
Any lawyer, or an aspiring lawyer, cannot deny that knowledge of tax law is required at any point of time. If taxation is your specialization, this is an area you cannot afford to ignore, as international taxation requires expertise. The expertise in this area is crucial as there are various foreign companies who want to understand the tax implications of their global moves.
Not just that, lawyers these days frequently encounter international taxation/transfer pricing issues in many international transactions. They have an option to steer the transactions through these issues by performing the work themselves, or referring to an expert, but they cannot take a hands-off approach.
Even if you are someone who does not understand international tax and transfer pricing, and wants to restrict yourself to your area of corporate law or intellectual property expertise, you will still need to walk each step with your client and ensure that the involvement of another expert plays out successfully. If you can’t take full responsibility for steering the transaction, the client may not want to engage with you on such matters. Thus, this field is more rewarding than ever.
However, The talent deficit in this sectors has never been as high as it is now. There has perhaps never been a better time to learn international taxation and transfer pricing laws, owing to growing international trade and increasing industry demand. This will only go up. How you can do it is by either assisting a lawyer dealing with transfer pricing cases, interning at a reputed company who deals with international transactions or taking up this course which is a comprehensive guide on every practical aspect associated with transfer pricing.
With the rise in international trade and ease of doing business, the desi companies are going truly global. High time, we as lawyers adapt ourselves to the change too.
All the luck.