Primary adjustment

A primary adjustment is a modification made by a tax authority in the taxpayer’s home jurisdiction to the taxable profits of a company. It typically arises when the arm’s length principle is applied to transactions between a company and its related or affiliated enterprises in other tax jurisdictions. Key Features of Primary Adjustment Purpose Ensures that intercompany transactions are priced as if they were between independent parties. Corrects profits reported to reflect fair market conditions. Application Applied by the tax administration of the country where the company is headquartered or operates. Focuses on cross-border transactions such as: Sale or purchase of goods and services Loans and interest rates Intellectual property transfers Management fees and royalties Arm’s Length Principle A transaction is adjusted if it differs from what independent enterprises would have agreed upon under similar circumstances. Ensures taxable profits are not artificially shifted to lower-tax jurisdictions. Outcome Increases or decreases taxable income of the company in the initial jurisdiction. Often triggers a secondary adjustment in the related jurisdiction to avoid double taxation. Importance of Primary Adjustment Maintains fair taxation across jurisdictions. Prevents base erosion and profit shifting (BEPS) by multinational companies. Ensures compliance with international tax norms like OECD guidelines. Protects government revenue by taxing profits appropriately where economic activity occurs. Example A company in India sells goods to its subsidiary in Singapore at a price below market value. The Indian tax authority makes a primary adjustment to increase the taxable profits in India, reflecting the arm’s length price