Wednesday, September 10, 2008

#47- Arms Length Transactions

Let's illustrate transfer pricing issue among 2 inter-company within the same Group.
Company A is incorporated in British Virgin Island and is not subject to tax.
Company B, which is Company A's subsidiary incorporated in USA, and is subjected to USA corporate tax.

Company B is making profit this financial year, and has a taxable profit of US$100million subjected to USA corporate tax. Company A might illegally 'transfer' the taxable profit of Company B to Company A, who is residing as a tax heaven, where no tax is payable on profits earned. To illustrate, Company A might charge Company B a lump sum of 'management fees', 'IT support fees' 'royalty fees', etc and resulted in the decrease in Company B' taxable profit.

Hence, while performing audit, we need to be aware of the nature of the inter-company transactions, and to test that the transactions are within arms length (it often requires expert to perform arms length test). This is to counter strike the transfer pricing issues mentioned above.

1 comment:

Keith said...

We as auditors is suppose to check the true and fair view of the financial statement, if the management insist of charging the management fee, there's no reason we as the auditors would object even though it might not be arms length transactions. It's just the tax department might look it as problems.