Transfer Pricing for CFOs/ Tax Heads (Learning Byte 03)
Who is an agent and how to set an agent"s remuneration (Transfer Pricing Perspective)? Most business persons would know who is an agent in common parlance but is the same meaning also true for Tax/ Transfer Pricing purposes?
As per Common Law (or codified Indian Law of Contract , 1872 in India )an agent is someone with power to bind principal in contracts with third parties. In other words agent has the power to determine the terms of the contract ( this could be to a varying degree - even limited power to offer discount is considered sufficient). A vanilla marketing support service provider on the other hand has no such power but merely acts as an information gatherer or communication channel for market related information.
With greater power comes a greater reward and an Agent takes a cut in the deal rather than a return on cost. Return on sales ( to agent) versus return on cost (to MSS) makes all the difference.
Agency and marketing support operations are commonly confused with each other but each has a different set of implications in terms of functionality and risk/ reward profile. So next time when your company engages a related party for marketing be clear of the extent of involvement - whether it is just relay service or is there active involvement in deal negotiation. First know the characterization and then set the return accordingly. It could make all the difference between arm's length pricing versus mispricing.
Hope readers are benefiting from these Learning Bytes. Reader comments/ queries are most welcome!