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Total Number of Subscribers: 464 |
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Date:10th December 2008 |
Compiled by Mr. M. Sathya Kumar |
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Top transfer
pricing issues the Budget should address With global financial markets in turmoil, even as credit lines
remain frozen, the major concern for the managements is the preserving of
cash flow. To maintain profits or at least stay afloat companies in sectors
such as real estate, aviation, information technology (including BPOs) have
started downsizing their employee base, with the consequent negative impact
on the economy. "This is the appropriate time for the Government to
introduce fiscal measures to withstand the global slowdown and give a boost
to our economy," says Mr Vispi T. Patel, the head of direct tax practice
at Economic Laws Practice (ELP), Mumbai. The Government should also consider making appropriate changes
in the legislation and other regulatory aspects which could ensure that
businesses (especially multinational enterprises or MNEs - Indian as well as
foreign) do not face undue hardship and, hence, do not have to resort to
short-term solutions such as reduction in workforce, he adds, during the
course of a recent email interaction with Business Line. "In today's gloomy economic scenario, the Indian Revenue
authorities could be more proactive and ease the pressure on MNEs to
encourage investment and growth in our economy by providing transparency in
the law," Mr Patel suggests. "Softening the stand taken by TP (transfer pricing)
authorities during the slowdown would be the need of the hour. This will help
our economy to sustain itself in the financial crisis." TP, for starters, is one of the most-debated topics in
international tax and has given rise to billions of dollars in adjustments
throughout the globe, due to the Revenue authorities being zealously
protective of their tax base. While TP is a necessary regulatory tool to deter shifting of
profits, it must be administered with greater understanding of MNEs' business
model, reminds Mr Patel. Weightage should be given to the commercial realities of today
and thus TP should be adjudicated fairly on economic substance and not only
as a quantitative exercise, he emphasises. "TP as well as other tax legislation should not be
hindrances in the Indian growth story. "The easing of administrative burden on the MNEs and
certainty in TP and other tax matters could give a fillip to the industry to
continue its march forward, especially in these difficult times." Excerpts from the interview, in which Mr Patel also looks at the
issues the next Budget can address in the area of TP. Why a focus on TP? India's TP legislation dates back to 2001 and has been rapidly
evolving since then. TP audits in the country have generated great controversies and
revenues to the Government, due to an exponential increase in audit activity
(four rounds of TP audits have been completed so far) resulting in
ever-increasing TP adjustments year after year. The need of the hour is clarity on a number of issues revealed
through the TP audits, in order that those investing in the country are not
put to undue hardship and, at the same time, ensuring the country gets its
fair share of taxes. What are the top TP and related issues that the next Budget
should address? APA (advance pricing arrangement): MNEs are faced with a host of
tax litigations. Hence, to provide clarity and certainty in TP matters,
introduction of APA could be beneficial. Many countries have adopted the APA mechanism, which enables
taxpayers to proactively obtain tax authorities' acceptance vis-…-vis proposed pricing of intra-group transactions and obviate
controversies and litigation after the transactions are implemented. This allows the MNEs to plan their business strategy with a
reasonable fiscal certainty. Safe harbour rules: Apart from the above dispute resolution
mechanism, certain safe harbour provisions could be introduced. Safe harbour
rules provide the circumstances in which tax authorities would automatically
accept transfer prices. For example, the current rules provide for relaxation of
documentation requirements where the aggregate value of international
transactions is less that Rs 1 crore. The same could be increased to Rs 5
crore. This will reduce the administrative burden of many small players. Specific exemptions: Certain additional safe
harbours can be introduced, like exemption for statutory filing requirements
for certain start-up companies or companies having value of international
transactions less than a specified threshold limit, etc. This can go a long
way to reduce taxpayers' hardship and help the tax authorities focus on other
more critical areas of TP. Range: Further, the use of `range' concept instead of
`arithmetic mean' and also defining the standard set of range to be followed
by a particular industry can reduce the hardship on the taxpayer. TP audit of foreign entities: Certain international transactions
with MNEs - example, royalty/ interest payments - may give rise to income in
the hands of the foreign entity. In such cases, the TP regulations are
applicable to both the Indian and the corresponding foreign entity, since the
arm's length principle is required to be applied to the international
transaction per se and not only to the Indian entity. It would also be debatable whether the foreign entity should be
made to comply with the Indian TP regulations when the corresponding Indian
entity has already demonstrated adherence to the arm's length standard. For
the sake of simplicity, the compliance and consequent adjustment to the
foreign entity should only be in exceptional cases. Double economic taxation: The TP regulations in India are
anti-abuse provisions and the purpose of introducing the same is to avoid
shifting of profits from India to another tax jurisdiction. However, in the
case of an adjustment in the hands of a foreign entity, an increase in income
in the hands of the foreign entity does not automatically allow a
corresponding increase in expenditure in the hands of the Indian entity. This results in hardship to the taxpayer, as it leads to double
economic taxation, which can never be the goal of TP regulations. Such double
taxation should be avoided on the grounds of equity, and hence the law should
be amended to avoid such a scenario. Centralised cost centres: Nearly every MNE group has regional or
international centralised cost centres with the avid intention of taking
advantage of scale, synergy, costs, etc. These costs will be pooled by a
designated cost centre and allocated to various group members worldwide on
the basis of a pertinent cost key on full cost basis or on cost plus
appropriate mark-up. These transactions need to be in accordance with the arm's
length standard; however, no specific guidelines are currently available on
the subject. Some more clarity is needed in this regard and the Indian
Revenue authorities also need to factor in the business exigency for setting
up such centralised cost centres by global companies. Intangible benefits: Tax authorities insist on the benefits
derived from above intra-group cost allocation, which may be difficult to
substantiate considering that most of the benefits are intangible in nature.
There is clearly a need for a more focused set of guidelines on this subject.
Attribution of profits to PE: The Central Board of Direct Taxes
(CBDT) needs to give clarity on the subject of attribution of profits to
permanent establishment (PE), especially on how the PE should correctly
capture its economic substance so that the profits attributable to the PE are
in sync with its functions performed, assets employed and risks assumed, so
that further attribution of profits to the foreign enterprise may be
obviated. Source
: Article by MR VISPI T. PATEL, HEAD, DIRECT TAX PRACTICE, ECONOMIC LAWS
PRACTICE, MUMBAI. |
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