Transfer pricing implications on supply chain – An analysis

March 01,2018
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Munjal Almoula (Partner, Grant Thornton India LLP)


Multinational Groups typically tend to operate in several jurisdictions with a view to make their products and services available to their customers. Often the overall act of delivering its products / services to its end customers is spread across a number of legal entities located in different countries to ensure delivery of products / services to customers in the most efficient manner. The rationale for spreading the operations across multiple locations is linked to business reasons and could, inter-alia, include:

  • Sourcing of raw materials available in a particular region;
  • Reduced cost of production
  • Availability of skilled work force
  • Efficient delivery of products in customer location
  • IP protection laws etc

On this account often a Group’s supply chain is designed based on business needs and commercial rationale. However, the profitability of a business does eventually get impacted by how that supply chain is structured to minimise trade and tax expenses. To this effect, often MNE Groups use the differential tax rates available in different countries to structure the inter-company pricing within their supply chains to optimise their tax costs.

Tax implications

Whilst MNCs try and align their pricing arrangements to optimise their tax costs, they are impacted by significant changes in the international tax environment across the world. None more significant than the Base Erosion Profit Shifting (BEPS) regulations being formulated on a global level to bring about greater transparency and equity within the taxation system around the world.

With the essential focus of the BEPS action plans on aligning profits from related party transactions with commercial realities and economic substance, one can expect the Governments in various countries to challenge and disregard aggressive pricing models adopted, designed to achieve an optimised effective tax rate. The three tier transfer pricing documentation system adopted by various countries, especially the Country by Country report and the Master File, would enable the identification of such aggressive pricing arrangements amongst the various legal entities of an MNC Group.

Scenario 1 - sale of goods


Operations and pricing


Tax rate



Pricing arrangement



- Conduct research and development

- Team of 50 scientists including head of Group R&D

- Conduct end to end R&D towards groups IP legally owned by Co C

Contract research and development for Co C

Cost plus 20%



- Manufacture Group’s products on an end to end basis

- Takes all decisions regarding manufacture of Group’s products

- Drop ships products to customer of Co C

Contract manufacturer to Co C

Cost plus 10%



- Principal entity within the Group

- Legal owner of IP

- Invoicing sales to customers


Residual profits / losses



- Marketing products to customers in its country

- Solicitation includes negotiation with customers

Marketing for Co C

Cost plus 7%

Potential challenges

The inter-company pricing arrangement within the supply chain of the Group is so designed to ensure that all super profits emanating from the sale of products to customers resides within Co C.


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