Here are few ways to refine transfer pricing regime
Highlights
Globalisation has led to manifold increase in cross-border transactions. And, it is estimated that 70% of such deals take place within group companies. Indian corporates, too, (especially, software and pharma companies) have become global players. This makes transfer pricing a vital area for tax payers as well as tax authorities.
India introduced transfer pricing regulations in 2001, which were in line with OECD guidelines barring a few aberrations. The recent audits by the tax authorities have resulted into some concerns, especially, on the typical approaches during the course of audit.
Initial positions by a tax authority tend to evolve towards ���globally accepted best practices��� over a time frame and India is no exception to this rule. Some of the key areas to address the concerns and move towards the global practices are discussed below:
Advance Pricing Arrangement (APA) Mechanism and Competent Authority Process
APA is an agreement that determines in advance an appropriate set of criteria (method, appropriate adjustments thereto, etc) for international transactions for the determination of the transfer prices over a period of time. APA is binding on both the taxpayer and the tax authority.
APA���s are becoming popular in many countries as they provide tax certainty, reduce compliance cost and resolve complex transfer pricing issues. The countries that have adopted this process include India���s major trading partners and investors including USA, UK, Canada, Germany, China, Japan and Korea. For resolving economic double taxation, it will be also necessary to strengthen the procedures and practices under the existing Mutual Agreement Procedure.
Safe Harbor Rules
Safe harbor rules provide the circumstances under which the tax authorities would automatically accept transfer prices. The rules could, for example, require taxpayers to establish transfer prices or results in a specific information reporting and record maintenance provision with regard to controlled transactions.
At present, there are no specific safe harbor rules in the regulations. However, the following factors can be considered: Substantial increase in the limit of Rs 10 million for maintenance of documentation and introduction of a basic threshold for tax assessments by prescribing a minimum margin.
For instance, the Australian Tax Office accepts income-tax returns of taxpayers (providing services) if they declare a mark-up on cost of 7.5% or more. This will be particularly useful for IT and IT-enabled services. Adoption of Custom Valuations and Exchange Control Regulations for appropriate cases.
Concept of ���Arm���s Length Range���
The regulations contain the concept of a single arm���s length price (arithmetic mean). In a few cases, one can arrive at a single reliable comparable price. However, practically there will be many occasions when arm���s length prices comprise of a range of prices, all being equally reliable. It is therefore necessary to introduce the international concept of ���arm���s length range���.
Multiple Year Data
The regulations requires comparing only one year of tax payer���s data with that of comparables. This ignores the concept of business cycles. In some industries, example, auto industry, model cycles may be as long as 5 to 8 years and during that period, a company���s results may fluctuate. Hence, an averaging of results over a period that covers the entire cycle avoids potentially misleading comparisons being made when only a single year���s results within a model cycle are observed.
Administrative Rulings/Guidelines
It is appropriate time that the CBDT issues clarifications/guidelines along with illustrations on nuances of method selection and comparables. These will assist in implementing the regulations in a consistent manner.
Audit Process
The significant number of assessment cases within the statutory timeline puts pressure on TPOs. Strengthening the transfer pricing cell and a longer tenure for the TPOs can reduce the imbalance. Continuous training can also be imparted. The current criterion of selecting all taxpayers, with Rs 150 million can be enhanced or be replaced with qualitative criteria example cases of continuous losses; or dealing with tax havens, etc.
Lowering of Stringent Penalties
The penalty of 100 to 300% of the additional tax and 2% penalty of international transactions for documentation are significantly high. This stringent penalties may be lowered. A basic threshold limit may be prescribed for invoking penalty. A penalty oversight committee (different from the field officers) can be constituted to approve the penalty.
Samir Gandhi & Rakesh Alshi
(The authors are with Deloitte Haskins & Sells)
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