There is a popular saying that “the only constant thing in life is change”. This means that there is always an evolution going on somewhere and we can choose to acknowledge it or not.
This however has proven to be much truer in the business world. The ways and processes of conducting business in the last decade is dramatically different from the ways in which we conduct business operation in this era.
These change has permeated all fibers of the business end and in this blog post, we’ll be discussing one of the issues that has changed the face of business.
In a bid to maximize profit and minimize cost including taxes, companies and organizations around the world now have strategic planning and thinking processes that allow them to make more money with reduced cost of business.
One of the very cost they try to avoid is tax and one of the best ways in which they perpetuate this legal reduction in their cost is through transfer pricing.
How To Use Transfer Pricing?
The concept of how transfer pricing is used in tax avoidance can be explained in a situation as follows:
A company which has another related party company based in a different country transacts with each other at a discounted or excessive price for the goods or services with the intention of achieving a tax advantage.
The companies may be under the same management, share the same parent company or simply share a strategic partnership. Imagine that company A is a subsidiary of company B. Company A produces rice in Malaysia and exports to company B.
Company A, in the process of trying to reduce its taxes decides to sell its product to company B at a price that is lower than the average market price. This would result in a lower tax outflow for Company A and ultimately a higher profit for the Group as whole.
In a nutshell, a tax advantage is achieved by tweaking the prices between organizations. It’s also common for profit earned in the trade to be transferred to a lower tax jurisdiction.
Hence, most governments these days, including Malaysia have introduced their own transfer pricing regulation. Transfer pricing in Malaysia is well regulated and watched to avoid shady type of tax avoidance schemes.
These companies fail to understand that while their actions might seem profitable to them in the short term,it is at the detriment of the economy and ultimately the country. To know more details about transfer pricing, get in touch with us.