'Advance Pricing Arrangements are the way to go for India'
Dr Garry Stone talks about the transfer pricing regulation in India.
By Deepshikha Sikarwar, TNN |
Transfer pricing is a contentious issue, not just in India but even in countries that have a longer history of cross-border transactions. Even the US has recently introduced changes in its transfer pricing regulations. Dr Garry Stone, the global and US leader of the Transfer Pricing Group of PricewaterhouseCoopers (PwC), has directed and performed a number of analyses of inter-company pricing and economic valuation issues for Fortune 500-size companies. In an interview with ET Dr Stone talks about the transfer pricing regulation in India.
What is your view of India’s transfer pricing laws? What are the changes required, if any?
What is your view of India’s transfer pricing laws? What are the changes required, if any?
| Dr Garry Stone |
India’s transfer pricing law is a relatively new one. It is fundamentally consistent with the OECD guidelines. But there could still be some bit of learning on the application side. There are some basic issues such as multiple year analysis that need to be resolved. Since transfer pricing issue is not a single year transaction issue and all multiple year transactions have to be taken into account, companies’ business cycles need to be acknowledged.
Internationally, some countries allow averaging of business cycles by adopting a multiple year analysis. In India, a single year is taken for evaluating transfer prices, while in the United States some flexibility is given to taxpayers.
The other issue that needs consideration is that of comparability. There is lack of data on comparables, thus requiring a more broad-based analysis with a larger acceptable range of results. In the absence of the right comparables, there could be adjustments. More focus should be placed on business realities, commercial considerations and economic principles. It is a phase of evolution for India.
Are Advance Pricing Arrangements (APAs) the appropriate approach for India?
Many countries in the world have adopted APAs. These arrangements avoid controversies and associated litigation costs. For companies such arrangements bring certainty and predictability. India can go for bilateral APAs wherein the two countries are involved in the discussions and are party to the agreement. Administratively, APAs should be the way to go for India.
In India rules are being discovered through audits. This approach brings about uncertainty for the taxpayers. Also, it is better to carry out any negotiation on APA of any kind at the central level to bring about consistency. National level best practices should be formulated. Also, it is better to try out alternate means of dispute resolution like arbitration and mutual agreement procedure. Some governments such as the US also call industry experts to examine the documents filed by the company. Transfer pricing rules and practices need to be certain. Advance pricing arrangements allow companies and the government both certainty on the quantum of tax and regulations with regard to transfer pricing.
India has not opted for safe harbour. Do you think it is the right way ahead for the country?
Safe harbours follows the one-size-fits-all kind of approach. (Safe harbour rules provide the circumstances in which tax authorities would automatically accept transfer prices.) Many countries, including the US, have moved away from safe harbours because of the difficulties involved. Also, from a government’s point of view, there are issues. The governments, for instance, on their part may not be able to collect appropriate taxes.
The US is set to introduce new changes in its transfer pricing regulations. What could be the impact on Indian companies that have set up subsidiaries there?
The new US Service Regulations would require Indian companies to carefully evaluate their transfer pricing with the US subsidiaries. This would be more relevant for subsidiaries of Indian companies undertaking intense marketing activities in the US. Robust documentation, including written contracts, would assume more relevance under the new regulations. Subsidiaries of Indian companies will have to brace themselves in terms of the additional requirement of documentation.
Internationally, some countries allow averaging of business cycles by adopting a multiple year analysis. In India, a single year is taken for evaluating transfer prices, while in the United States some flexibility is given to taxpayers.
The other issue that needs consideration is that of comparability. There is lack of data on comparables, thus requiring a more broad-based analysis with a larger acceptable range of results. In the absence of the right comparables, there could be adjustments. More focus should be placed on business realities, commercial considerations and economic principles. It is a phase of evolution for India.
Are Advance Pricing Arrangements (APAs) the appropriate approach for India?
Many countries in the world have adopted APAs. These arrangements avoid controversies and associated litigation costs. For companies such arrangements bring certainty and predictability. India can go for bilateral APAs wherein the two countries are involved in the discussions and are party to the agreement. Administratively, APAs should be the way to go for India.
In India rules are being discovered through audits. This approach brings about uncertainty for the taxpayers. Also, it is better to carry out any negotiation on APA of any kind at the central level to bring about consistency. National level best practices should be formulated. Also, it is better to try out alternate means of dispute resolution like arbitration and mutual agreement procedure. Some governments such as the US also call industry experts to examine the documents filed by the company. Transfer pricing rules and practices need to be certain. Advance pricing arrangements allow companies and the government both certainty on the quantum of tax and regulations with regard to transfer pricing.
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India has not opted for safe harbour. Do you think it is the right way ahead for the country?
Safe harbours follows the one-size-fits-all kind of approach. (Safe harbour rules provide the circumstances in which tax authorities would automatically accept transfer prices.) Many countries, including the US, have moved away from safe harbours because of the difficulties involved. Also, from a government’s point of view, there are issues. The governments, for instance, on their part may not be able to collect appropriate taxes.
The US is set to introduce new changes in its transfer pricing regulations. What could be the impact on Indian companies that have set up subsidiaries there?
The new US Service Regulations would require Indian companies to carefully evaluate their transfer pricing with the US subsidiaries. This would be more relevant for subsidiaries of Indian companies undertaking intense marketing activities in the US. Robust documentation, including written contracts, would assume more relevance under the new regulations. Subsidiaries of Indian companies will have to brace themselves in terms of the additional requirement of documentation.
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