The IRS is investigating allegations of transfer pricing at the BBC

The Income Tax Department conducted surveys at the British Broadcasting Corporation (BBC) offices in Delhi and Mumbai. The BBC has purposefully broken transfer pricing rules.

Transfer Pricing as a Tax Avoidance Strategy

  • Transfer pricing is the practise of determining the price at which goods, services, or intangible property are sold across international borders between related entities within an enterprise.
  • Multinational corporations transfer profits to low-tax jurisdictions in order to reduce their tax liabilities.

What exactly is a “Survey” under the I-T Act?

  • The Income Tax Act of 1961, Section 133A, authorises the Income Tax Department to conduct surveys to collect hidden information.
  • I-T authorities have the authority to enter any place of business or profession under their jurisdiction, verify books of account, and impound documents if necessary.

What exactly is an IT search?

  • Section 132 of the Income Tax Act authorises the Internal Revenue Service to conduct searches when it has reasonable grounds to believe that someone is in possession of undisclosed income or property.

Differences between a survey and a search

  • A survey is a less serious proceeding than a search and can only be carried out during working hours on business days within the officer’s assigned area.
  • In contrast, a search can take place on any day after sunrise, and the entire premises can be inspected with the assistance of police to uncover undisclosed assets.
  • While the scope of a survey is limited to the inspection of books and the verification of cash and inventory, the entire premises can be inspected with the assistance of police to uncover undisclosed assets.

During a search, the I-T authority has the following powers:

  • Only the Finance Act of 2002 included provisions for impounding or seizing goods.
  • An authorised officer may enter and search any building or place where he has reason to suspect that such books of account, other documents, money, bullion, jewellery, or other valuable article or thing are kept during a search, according to the Act.
  • Break/open the lock of any door, box, locker, safe, almirah, or other receptacle where the keys are not available in order to exercise the powers granted by clause I
  • Seize any such books of account, other documents, money, bullion, jewellery, or other valuable article or thing discovered during the search;
  • Make or cause to be made extracts or copies of any books of account or other documents with identification marks;
  • Make a record of any such money, bullion, jewellery, or other valuable item or thing.

What are Transfer pricing rules?

  • Countries can ensure that companies pay taxes on profits generated within their borders by establishing transfer pricing rules.
  • Transfer pricing rules are used to determine the “arm’s length price” at which related entity transactions should occur.
  • The arm’s length price is the price that would have been charged in similar circumstances between unrelated entities.
  • The rules are intended to ensure that related entities do not shift profits to low-tax jurisdictions and that different countries’ tax authorities receive their fair share of taxes.

What role do tax authorities play in preventing transfer pricing?

  • Transfer pricing audits can be conducted by tax authorities to determine whether the prices used in transactions between related entities are in accordance with the arm’s length principle.
  • Arm’s length principle compliance: If the tax authorities discover that the prices are not in accordance with the arm’s length principle, they can adjust the prices and levy taxes accordingly.

What exactly is the “Arm’s Length Arrangement” that the BBC is accused of violating?

Section 92F(ii) of the Income Tax Act, 1961 defines arm’s length price as “a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions”.

According to Section 92C(1), arm’s length shall be determined by the “most appropriate” method among the following:

  • comparable uncontrolled price method;
  • resale price method;
  • cost plus method;
  • profit split method;
  • transactional net margin method;
  • such other method as may be prescribed by the I-T Board.

During India’s G20 presidency, there will be a green transition

  • The G20 agenda prioritises energy transitions. The geopolitics and governance of energy have become enormously difficult in 2023, during India’s presidency, as the transition from fossil fuels to renewable energy, concerns about energy security, and, in many cases, the pressure on keeping financial commitments made related to addressing climate change have all become complicated.
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