Within a group of companies (whether associated by shareholding or merely common shareholders/directors), there usually exists a “transfer pricing” mechanism to govern the respective activities, profit performance, tax burden and/or distributions of income.

In the eyes of the general public, “transfer pricing” governs inter-company transactions (“related party transactions”, “RPT”) like buying and selling of products among the group companies only. However, there are more RPTs to be noticed, like:

• royalties
• management fees
• lending/borrowing interest
• share of expenses
• consulting fees

Certain aggressive management has tried to implement RPTs between profitable and unprofitable companies, higher and lower tax rate regions, bias in distribution of income or interest, etc. Many of these RPTs were being settled by actual bank transfers.

However, each tax authority would look into a RPT from the perception of its jurisdiction, practices, motives and the most critical of all, would the RPT be a

fictitious or fraudulent transaction. Once ruled as an unacceptable transaction, additional taxes and heavy penalties would be levied on the tax payer. Our advice is – never let greed surpass your consciousness.