Transfer pricing: A guide to hassle-free fund transfers for Indian startups

A growing number of Indian startups are headquartered abroad. According to the Global Unicorn Index 2024, Indians have founded more offshore high-value startups than any other country—with 109 unicorns headquartered abroad, compared to 67 in India.

In this off-shore model, moving money predictably and conveniently across borders is critical to the success of a startup. However, the existing payment infrastructure is neither predictable nor convenient due to FX fluctuations, opaque processing fees, delays and paperwork.

Read on to find out how startups in India can access a simplified process to transfer funds from their global HQ to the Indian subsidiary - quickly and at an affordable cost.

Transfer pricing transactions involve arrangements between the global entity and its subsidiary or group company in India–in this case, the funded startup– for services to be performed by the company and transfer pricing represents the costs the company would typically charge an unrelated party in a similar set-up for its services. In simple terms, the pricing structure which requires the global HQ to transfer funds to its Indian subsidiary in exchange for services is typically known as transfer pricing. 

Transfer pricing helps startups in India manage international transactions without worrying about tax and legal concerns, and it provides transparency and clarity to authorities in both countries. The transfer pricing model ensures that the earnings are distributed appropriately, preventing any kind of tax default or, in some cases, double taxation. With transfer pricing, globally funded startups in India can easily optimize the global tax burden while staying compliant.

In an offshore high-value startup model, the Indian subsidiary functions purely as a cost center. This means the Indian subsidiary raises an invoice towards its global HQ for the services it provides to run its operations, adding a certain percentage based on the type of service they provide to their global HQ. This percentage is called the Transfer Pricing markup.

Export services are a zero-rated supply, which means some service exports do not attract any GST as per Indian regulations. Indian start-ups may choose to pay IGST on the exported services if they have accumulated input tax credit. They can offset the input tax credit against the IGST and pay the balance and claim a refund on the IGST paid. Therefore, in the case of transfer pricing transactions, the GST on service exports is paid by the Indian entity, which eventually helps them claim a refund–proving to be an advantageous setup.

P.S: The rapid expansion of startups, primarily fueled by rising investments, can quickly overload their financial and tax systems. The transfer pricing markup can vary depending on the services and use case. It is advisable to consult an independent auditor or a Chartered Accountant to determine the markup percentage.

For example: The Indian subsidiary of a startup has to pay INR 10 lakh to meet payroll and vendor payments.

The CA, an expert in tax and financial matters, calculates the markup to be 18% based on the services provided and the prevailing market conditions.

So, the said Indian startup raises an invoice of INR 11.8 lakh to the HQ entity that sits outside India. Consequently, the Indian subsidiary pays Income Tax on the marked-up amount, i.e. INR 1.8 lakh.

Startups in India typically collect funds from their global HQ monthly or, in some cases, quarterly for the services they offer.

The current process for global HQ startups transferring funds to India involves multiple steps, including expense forecasting, invoice preparation, currency calculation, bank transactions, and compliance follow-ups, often leading to delays and complexity. It is often riddled with:

1. High fees

When transferring money from the global HQ to the Indian subsidiary, a startup has to pay fees charged by their banking partners. Here is a list of the typical fees that startups can end up paying for a transfer pricing payment:

-SWIFT wire charge: up to `$30`

-FX conversion charge: Approximately `3.0%` on the bank rate

- GST charge: (a maximum of)`18.0%` on the FX conversion rate

1. FX rates on currency conversion

Like any other global payment, international transfers are also subject to the FX rate. Typically, startups can contact their banking partners for a better FX conversion charge. Often, Banks and cross-border or some international payments service providers add a margin to the exchange rate. This FX or foreign exchange rate margin can change significantly from one provider to another. In most cases, the rate margins are not transparent, making it unpredictable and demanding to determine the precise rate.

• Forex rate uncertainty

Most companies that engage in international funds transfers know the amount they need to move in Indian Rupees at a certain period to ensure seamless operations. This means that the Indian subsidiary must be well prepared with the funding to manage payouts and service fees to run a well-oiled machine. However, FX rates fluctuate by the minute, making determining the receivable INR amount difficult.

Take a look at the following chart, showing variations in FX rates in the space of a week.

If a startup moves $300000 on September 11th, 2024, the exchange rate they would get is 84.0434. If they choose to transfer funds on September 13th, this reduces to 83.8691. This is a shortfall of INR 52,290.

• Lack of convenience

There is no guarantee that once the transaction is initiated, it will reach the subsidiary’s Indian bank account by the next business day. Typical International wire transfers, usually powered by SWIFT, can take 2-4 business days to land in the Indian bank account. After receiving the money, the Indian subsidiary must follow up with their bank to obtain the necessary compliance paperwork.

To alleviate the complexities and uncertainties of the transfer pricing process, Xflow offers a tailored solution for Indian startups. Here are its key features:

• Know the precise INR receivable: With the option to lock the FX rate up to 45 days in advance, startups can know the exact receivable amount at the time of withdrawal.

• Transfer funds at a cost-effective rate: Gain access to transparent costs of just ‘0.5%’ for a ‘USD to INR’ funds transfer. Furthermore, Xflow benchmarks the pricing to the mid-market rate, ensuring additional transparency.

• Manage funds via local payment methods: Transfer funds using local payment methods like Fedwire or ACH. These methods work like NEFT or IMPS in India–making it easier and faster to transfer funds than any other payment methods.

• Receive funds by the next business-day: International payment transfers powered via SWIFT usually have a processing time of up to 2 to 4 business days. But, with Xflow, once the payment is initiated by the global HQ, its Indian subsidiadry can settle those funds within 1 business day. What’s more? The India-based startup can also trak the payment all the way up to deposit in its INR bank account.

• Compliance on auto-pilot: Xflow offers an end-to-end solution, which includes one-click eFIRA for every withdrawal within 24 hours on the letterhead of an ‘AD-1’ bank–taking away the need for additional follow-up and simplifying the entire fund transfer process.

As Indian startups continue to grow and expand internationally, the efficiency and affordability of fund transfer from their global headquarters become increasingly important. Traditional processes often involve high fees, fluctuating exchange rates, and delays, making the transfers more complex, slow, and expensive.

By embracing more streamlined solutions, funded startups in India can navigate these challenges more easily. Achieving convenience, predictability, and transparency will not only help improve operational efficiencies, but also allows startups to focus on their core mission and strategic growth.