RECENT DEVELOPMENTS IN INTERNATIONAL AND DOMESTIC TRANSFER PRICING CA.T. P. OSTWAL

Transcription

1 RECENT DEVELOPMENTS IN INTERNATIONAL AND DOMESTIC TRANSFER PRICING CA.T. P. OSTWAL 1

2 7 Safe harbour provisions 8 Key Issues and Challenges in Domestic Transfer Pricing 6 New powers to the TPO 1 Recent Trends Recent developments in Transfer Pricing 5 APA & Roll back 2 Key Issues in International Transfer Pricing 4 Multiple year data and range concept 3 Deemed International transactions 2

3 Transfer Pricing Amendments Finance Bill 2014 Introduction of Rollback mechanism in Advance Pricing Agreements Strengthening the administrative set up of APA to expedite processing of applications Introduction of Range Concept Allowability of Use of Multiple Year for Benchmarking Changes to the definition of the term deemed international transaction u/s 92B Empowering TPO to levy penalties Determination of arm s length price (ALP) when more than one price is determined by most appropriate method from April 1,

4 Emerging international tax issues and effect on tax policies Increasing concern for both among developed and developing countries on base erosion and profit shifting, double non-taxation Impact of BEPS report and other changes on existing structures and proposed commercial transactions Developed countries too now looking at source based taxation due to Economic downturn, Net technology importer, FATCA imposition of withholding taxes on US source investment income 4

5 Emerging international tax issues and effect on tax policies Concern on Treaty abuse mounting Changing economic scenario should force Government to contemplate policy shift International taxation and TP controversies today are more than necessary to assure reasonable allocation of taxing jurisdiction among all countries to facilitate global job creation and economic growth 5

6 Recent trends 6

7 Transfer Pricing - Recent Trends TP additions of USD 41 billion approx Separate tribunal for TP India disputes still contributes under to more consideration than 70% of the TP global disputes * Introduced with effect from July 1, 2012, detailed rules prescribed on August 31, 2012 and guidance on APA with FAQs issued on April ** Draft rules introduced on August 14, 2013 inviting public comments and Final rules introduced on September 18, 2013 TP Week ranked India #1 on Top 10 Toughest Tax Authorities for TP APA Programme introduced* TP Adjustment (in INR crores) Final Safe harbour rules notified**

8 Key Challenges 8

9 Key Challenges IT / ITES Margins Arithmetic Mean Loan and Guarantee Fee Key Issues Undervaluation of shares Marketing intangibles 2 Royalty Pay-outs 3 6 Single Management year data Charges 5 4 9

10 THE VODAFONE SAGA PART III - SHARE VALUATION Bombay High Court Rules in Favour of Vodafone India in $490 Million Tax Dispute Facts Vodafone India, a wholly owned subsidiary of Mauritian entity Vodafone Tele-Services (India) Holdings Limited (Vodafone Mauritius), issued 289,224 equity shares of the face value of INR 10 (USD 0.16) each at a premium of INR 8591 (USD 140.7) per share in August 2008 to Vodafone Mauritius. The Indian tax authorities sought to tax this transaction by Vodafone India by applying the transfer pricing (TP) regulations. The primary ground was that Vodafone Mauritius subscribed to shares of Vodafone India at prices lower than the market price or fair price. Issue whether share issuance leads to income for the issuer; and if carried out between associated enterprises, should it attract the TP regulations? 10

11 THE VODAFONE SAGA PART III - SHARE VALUATION RULING OF BOMBAY HIGH COURT The Bombay High Court answered both these questions in the negative. The judgment clarifies that share issuance of the nature described above does not give rise to any income, and hence, there can be no question of applying the TP regulations. The vexed question of applying TP principles to share issuance has been laid to rest, and it can be anticipated that another 25 odd cases that are being litigated on a similar point before the courts will come to a near identical conclusion. 11

12 THE VODAFONE SAGA PART III - SHARE VALUATION The Road Map Ahead for Foreign Investors Internationally, funding a subsidiary by issuing shares is a common practice among multinational companies and is typically viewed as a capital transaction and out of the TP net. The verdict in this case has reaffirmed this aspect in the Indian context. The mode of re-characterization employed by the tax authorities is neither provided for under exact provisions of Indian tax law nor can it conceivably arise directly from the issue of shares. Again, the clarity in this verdict is likely to be viewed as a welcome step. Foreign investors who were in watch mode before infusing further equity into their Indian operations can take comfort from the fact that some clarity has been attained. However, it is important to note that consequent to an amendment to the income tax law with effect from 1 April 2013 the portion of consideration received for the issue of shares of a public unlisted company or private company to an Indian resident that is in excess of the fair market value of those shares, will be subject to tax in the hands of the companies under the head "income from other sources. 12

13 SECONDARY AND CORRELATIVE ADJUSTMENTS AND DOMESTIC LEGISLATION SECONDARY ADJUSTMENT INDIAN EXPERIENCE Indian parent company infuses share capital in the Foreign subsidiary (at premium or at face value per share in case of negative networth of subsidiary) The Revenue takes a position that the shares have been issued to the Indian Company at an overvalued price/more than the fair market value of the shares; The difference between the actual issue price and the ALP computed by the department is characterized as: Deemed Loan by the Indian Parent - treated as TP adjustment Notional Interest on deemed loan- treated as TP adjustment Outside India Indian Holding Co. Foreign Wholly Owned Subsidiary Subscription of shares of Foreign Co. India does not have an express or specific legislation for inflicting the secondary adjustments currently in vogue. However, in practice, authorities have been resorting to secondary adjustments in India.

14 Deemed International transactions 14

15 Erstwhile Provisions Section 92B(1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of. Section 92B(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise Third party T1 AE Overseas T2 India Taxpayer 8 15

16 Facts of the Swarnandhra Case IJM India ( IJMII ) entered into a joint venture with Andhra Pradesh Housing Board ( AP-HB ) and formed Swarnandhra IJMII Integrated Township Development Company ( Swarn ) IJMII rendered project management services to Swarn pursuant to an agreement between IJM AE and Swarn T1 Payment to IJMII (construction contractor) Swarn entered into transactions with IJMII TPO applied Section 92B(2); as per TPO, terms determined in substance between the Swarn and the AE Agreement entered into for project management services to be rendered by IJMII AP-HB IJM - AE IJMII Overseas India Question before the Tribunal: 49% T1 51% Whether transaction between IJM India and Swarn fall within the purview of Section 92B(2) Question of interposing independent third parties between two AEs to avoid transfer pricing applicability Swarn 16

17 Key findings of Hyderabad ITAT Swarn case: Though Section 92B(2) is a part of section 92B it is to be read as an extension of Section 92A(2) of the Act and not as an extension of Section 92B(1). For Section 92B(2) to apply, Section 92B(1) should first be attracted in this case Section 92B(2) cannot be applied/ attracted Domestic companies As both the parties are residents, the transaction between the Swarn and IJMII do not constitute an international transaction. The basic premise for invoking section 92B(2) does not arise. IJMII was the actual provider of services to Swarn it was not a company interposed between AE & Swarn to circumvent the TP provisions. Influence - In view of the active participation of the government in the functioning of the Swarn, it cannot be said that the AE would influence the entering into the contract by the taxpayer or its terms and conditions. Section 92B(2) is transaction specific and does not apply to all transactions between the enterprise and the unrelated person. Legislative intent - Identify transactions wherein intermediary is used to break a transaction in order to circumvent TP provisions i.e. substance over legal form Section 92B(2) not triggered 17

18 Facts of the Kodak Case T1 Sale of Medical Imaging segment, global basis vide Global Agreement between Kodak US and Carestream Inc T2 Pursuant to T1, Kodak India sells India business (segment) vide Agreement between Kodak India and Carestream India TPO invoked Section 92B(2) of the Act on the premise that India sale pursuant/ consequential to a larger sale transaction Kodak US 97.7% T1 Carestream Inc 99.9% USA INDIA Question before the Tribunal: Whether the sale of Indian business by Kodak India to Carestram India is a deemed international transaction? Kodak India T2 Carestream India 18

19 Key findings of Mumbai ITAT Kodak case: Language of Section 92B(2) for the purposes of sub section (1) i.e. either party has to be a non-resident (a strict interpretation is needed) Domestic companies individual and independent; no transaction involving a non-resident company No relationship established i.e. no connect has been established for the relevant transaction (Sale of India business) between Kodak India and Care Inc. or between Care India and Kodak US Kodak US Carestream Inc Kodak India Carestream India the preconditions are: - the existence of a prior agreement between the other entity and the AE in relation to the relevant transaction, or - there should be AE involvement in determining (in substance) the terms of the transaction. Section 92B(2) not triggered 19

20 Key findings of Mumbai ITAT Kodak case: In this regard, the following important submissions made by the taxpayer are relevant: - Terms and conditions of the sale were determined solely by the taxpayer and Carestream India and not by Kodak US; - Valuation of the business was undertaken by the taxpayer through its independent valuers; - The taxpayer received entire sale proceeds, and nothing was transferred to Kodak US; - There was no prior agreement between Carestream India and Kodak US for this sale transaction [as required by section 92B(2) of the Act]. Though, India agreement is a consequence of global agreement but this agreement did not have any role in/ effect on sales transaction. Matter cannot be restored to TPO for ALP determination if TPO in the first instance has ignored mandatory provisions of law. Section 92B(2) not triggered 20

21 Impact of the amendment to Section 92B(2) Impact of participation of another entity/ shareholder, Terms to be determined in substance, The current Section 92B(2) provides that transaction by an enterprise with an unrelated party shall be deemed to be a transaction between two associated enterprises if there exist a prior agreement between the unrelated party and Associated Enterprise of the enterprise or where terms of relevant transaction are determined in substance between the unrelated party and AE. The Finance Bill 2014 has amended section 92B(2) to state that the residential status of the unrelated party is immaterial for determination of deemed international transaction The ambiguity in the current section was whether or not the unrelated party has to be a non-resident for the transaction to be deemed international transaction Even though prior agreement, must have influence or effect, Document critical - showing no influence From April

22 Multiple year data & Range 22

23 Multiple year and Inter quartile range Current legislation Proposed legislation Multiple year* Restricted use of multiple year data # The revenue authorities insisted on use of data of the single year to which the transaction pertain s to. Arithmetic mean (as against universal standard of inter quartile range) considered as a measure of central tendency for computing arm s length price of international transactions Finance Minister proposed to amend provisions to allow use of multiple year data and range concept to align with international best practices "Provided also that where more than one price is determined by the most appropriate method, the arm's length price in relation to an international transaction or specified domestic transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly the first and second proviso shall not apply." Interquartile range Current arithmetic mean concept to continue where number of comparables is inadequate # Proviso to rule 10B(4) * Section 92C - third proviso to sub-section (2) w.e.f April

24 Multiple year data Use of single year data has contributed to significant amount of litigation in India. Multiple year data - factors business cycle impact, provides better comparability results Global best practices on use of multiple year data Country Use of Multiple year data Australia 3 out of 5 years China 2 out of 3 years U K 3 out of 5 years U S 2 out of 3 years 24

25 New powers to the TPO 25

26 New powers to the TPO The existing provisions of section 271G of the Act provide that if any person who has entered into an international transaction or SDT fails to furnish any information/ document as prescribed by the transfer pricing provisions, then such person shall be liable to a penalty up to 2% of the value of international transactions (or SDT) which may be levied by the AO or the CIT(A) In section 271G of the Act, after the words the Assessing officer, the words, figures and letters or the Transfer Pricing Officer as referred to in section 92CA shall be inserted with effect from the 1st day of October, Power to levy penalty 26

27 APA - Rollback provisions 27

28 APA - Roll back provisions APA An APA is an agreement between the taxpayer and the tax authority on the pricing of future intercompany transactions. APA Procedure APAs are presently available for a period not exceeding five years, starting from April 1, The taxpayer and tax authority mutually agree on the transfer pricing methodology ( TPM ) to be applied and its application for a certain future period of time for covered transactions APA Rollback Procedure The amendment to Section 92CC w.e.f October 1, 2014 will allow an APA entered into to be applied to four previous years for the transactions covered in the APA.* 02 * Subject to such conditions, procedure and manner as may be prescribed, provide for determining the arm s length price or specify the manner in which arm s length price shall be determined in relation to the international transactions 28

29 Global Perspective / Indian APA Scenario Roll back Provisions Indian APA Scenario Country Australia Roll Back Provision May conduct a risk assessment of past years to provide for roll back China Upto 10 years Japan Singapore U K U S Upto 3 years Upto 2 years May be considered May be considered Pre-filing meeting without filing fees (also on anonymous basis) APA Applications conversion of unilateral to bilateral & vice versa possible Approximately 150 applications filed in year 1 and 240 in year 2 Site visits by APA team had been completed in most cases 5 Unilateral APAs signed on March 31, 2014 APA team is positive & pragmatic and relates to business/ practical realities Past litigation would not automatically impact favourable APA resolution 29

30 Safe harbour provisions 30

31 Snapshot of Indian Safe Harbour Rules Nature of transaction Quantum of International Safe Harbour Margin transaction Software development services / ITeS Less than INR 5 Billion Exceeding INR 5 Billion 20% 22% KPO No range 25% Contract R&D services No range No range 30% (software) 29% (generic pharma) Intra - Group Loan to Less than INR 500 Million SBI Base rate % wholly owned subsidiaries Exceeding INR 500 Million SBI Base rate % Corporate Guarantee to Less than INR 1 Billion 2% pa wholly owned subsidiaries Exceeding INR 1 Billion* 1.75% pa Manufacture and export of auto components No Range No Range * credit rating of Adequate to highest safety from agency registered with SEBI 12% (core) 8.50% (non-core) 31

32 Safe Harbor India - Services The description of an eligible taxpayer with insignificant risk is in line with criteria prescribed in a recently issued Circular (No. 6/2013 dated 29 June, 2013) Foreign Principal Indian Service Provider (ICo) Economically significant functions (Conceptualisation, Design, etc.) Funds/capital and other economically significant assets including intangibles ICo is largely involved in economically insignificant functions ICo does not use any other economically significant assets including intangibles Capability to control or supervise through its ICo works under direct supervision of foreign strategic decisions to perform core functions as principal well as monitor activities Assumption of risks ICo does not assume or has no economically significant realised risks Ownership right (legal or economic) on outcomeico has no ownership right on outcome of of research research which shall also be evident from conduct of the parties 32

33 Financial Transactions # 1. Eligible International Transaction Loans provided by Indian companies to their wholly owned subsidiaries Proposed Safe Harbour The Interest rate is equal to or greater than the base rate of State Bank of India as on 30th June * of the relevant previous year plus: 150 basis points in case the loan does not exceed INR 500 Million (USD 8.5 Million approx) 300 basis points in case loan exceeds INR 500 Million ((USD 8.5 Million approx) 2. Provision of corporate guarantees by Indian companies to their wholly owned subsidiaries Base rate for FY % p.a Base rate for FY % p.a The commission or fee is 2.00% or more per annum if the amount guaranteed is less than INR 1 Billion (USD 17 Million) The commission or fee is 1.75% or more per annum if the amount guaranteed exceeds INR 1 Billion (USD 17 Million) subject to the credit rating of the AE, done by an agency registered with the SEBI, is of the adequate to highest safety 33

34 Procedural aspects Applicable for Financial Years and subsequent four years Documentation as per Section 92D of the Act and Accountant s Report in Form 3CEB as per Section 92E of the Act to continue, despite adoption of Safe Harbour rules The Safe Harbour rules are voluntary; in case the same are not opted for, the determination of arm s length price to be made without having regard to the Safe Harbour rules Time bound verification of eligibility and redressal forum. No penalties The Assessing Officer shall declare the option exercised by the tax payer to be invalid if taxpayer does not furnish adequate information or the requirement prescribed under the rules are not satisfied No Safe Harbour for International transactions with no tax or low-tax jurisdictions (countries with maximum marginal tax rate less than 15%) and notified areas as provided under section 94A of the Act A taxpayer opting for Safe Harbour rules would not be entitled to invoke Mutual Agreement Procedure 34

35 Safe harbour rules around the world Country Transaction Arms Length Safe Harbour Non-core services (i.e., where revenues / expenses Australia from such services do not exceed 15% of the Generally, a 7.5% mark-up on cost accepted Company's total revenues / expenses) Routine services such as payroll compilation, USA Routine intra-group services processing workers compensation, posting payments etc., charged at cost (without mark-up) are considered at arm s length Low value services such as accounting, tax or legal Japan Low value intra-group services services, debt collection etc., charged at cost (without mark-up) are considered at arm s length Import of goods, services and rights 20% gross profit for resale transactions, 60% grossprofit for manufacturing Brazil Exports Export price to be higher or equal to 90% of the average price in Brazilian market for same or similar products sold to unrelated parties by the entity or other companies Routine intra-group services ( where similar Singapore services are not provided to unrelated third 5% mark-up on cost accepted parties) Non-core services under a NZD 100,000 de New minimis threshold. Non-core activity is defined as Zealand an activity that is not integral to profit earning or 7.5% mark-up on cost accepted economically significant activities 35

36 Points to Ponder High margins for becoming popular dispute resolution route; however given the low cost base (for many small/ mid sized companies), Safe Harbour may still be worth evaluating to address the administrative burdens and achieving certainty, particularly for captive IT & ITeS companies While the Safe Harbour rules are optional, one will have to wait and watch the influence it has on the conduct and decision making of tax authorities Impact in case of overlapping services to be evaluated before hand These rules does not cover Domestic Transactions (i.e. Domestic Transfer Pricing) Neither the comparability adjustments are permitted, nor the benefit of tolerance band (+/- 3 % or 1%) is made available Given the high margins proposed under Safe Harbour, MNCs may consider APAs, preferably bilateral. 36

37 DOMESTIC TRANSFER PRICING ISSUES AND CHALLENGES 37

38 Introduction TP was earlier limited to International Transactions The Finance Act 2012, extends the scope of TP provision to Specified Domestic Transactions between related parties w.e.f. 1 April 2012 The SC in the case of CIT vs Glaxo Smithkline Asia Pvt Ltd [ Taxman 35 (SC)] recommended introduction of domestic TP provisions SDT previously reported/certified but onus on revenue authorities Obligation now on taxpayer to report/ document and substantiate the arm s length nature of such transactions Shift from generic FMV concept to focused ALP concept These new provisions would have ramifications across industries which benefit from the said preferential tax policies such as SEZ units, infrastructure developers or operators, telecom services, industrial park developers, power generation or transmission etc. Apart from this, business conglomerates having significant intra-group dealing would be largely impacted. Practice exists in USA,CANADA,GERMANY AND UK AS WELL 38

39 Section 92BA Meaning of SDT (inserted by Finance Act, 2012 w.e.f. AY ) For the purposes of this section and sections 92, 92C, 92D and 92E, specified domestic transaction in case of an assessee means any of the following transactions, not being an international transaction, namely:- (i) any expenditure in respect of which payment has been made or is to be made to a person referred to in section 40A(2)(b); (ii) any transaction referred to in section 80A; (iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA; (iv) any business transacted between the assessee and other person as referred to in section 80-IA (10); (v) any transaction, referred to in any other section under Chapter VIA or section 10AA, to which provisions of section 80-IA(8) or section 80-IA(10) are applicable; or (vi) any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of five crore rupees. 39

40 Benchmarking SDTs Determination of Arm's Length Price the approach Identification of SDTs Function, assets and risk analysis Selection of most appropriate method Economic analysis Calculation of Arm s Length Price Arm's length price determination a methodical exercise based on meticulous collation and analysis of data 40

41 Points for Consideration Whether the threshold limit of Rs. 5 crore applies to the aggregate amount under all the relevant sections taken together OR under each section separately i.e. 40A(2), 80A, 80-IA(8), 80-IA(10), 10AA etc.? Whether payment for capital expenditure Or expenditure capitalized is also covered? Whether the provisions will apply in case the payer s income is chargeable to tax under the head Income from other sources, because section 58(2) says The provisions of section 40A shall, so far as may be, apply in computing the income chargeable under the head Income from other sources as they apply in computing the income chargeable under the head Profits and gains of business or profession? Whether new provision applies to - Public Charitable Trust paying remuneration to related persons. Co-operative Societies Social Clubs having a business undertaking Transfer pricing provisions are not applicable in case where income is not chargeable to tax at all. Correlative adjustments - if excessive or unreasonable expenses are disallowed in the hands of tax payer at time of the assessment then corresponding adjustment to the income of the recipient will not be allowed in the hands of recipient of income. Hence, it would lead to double taxation in India. 41

42 Challenges Type of payments/ transactions Salary and Bonuses paid to the partners Challenges Benchmarking? Whether the limit as mentioned in section 40 (b) would be the ALP? Remuneration paid to the Directors Benchmarking? Whether the limit as mentioned in Schedule XIII would be the ALP? Transfer of land Joint Development agreements Whether the rates mentioned in the ready reckoner be considered as ALP? Benchmarking? Project management fees Benchmarking? 42

43 Challenges Type of payments/ transactions Allocation of expenses between the same taxpayer having an eligible unit and non-eligible unit Challenges Whether these allocation would be SDT Sec 80-IA(10)? Directly v/s Indirectly Definition of Related Party Concept of close connection or any other reason - Invoking section 80IA(10) Whether Assessing Officer can recompute the profits eligible for tax holiday if tax payer has business with another party of close connection earns more than ordinary profits because of such close connection or any other reason? 43

44 Key Takeaways Domestic Transfer Pricing Close tracking of covered transactions Maintain relevant and robust documentation Claims made need to be justified all invoices, relevant documentation should be maintained Benefit test is a must Economic rationale of each transaction needs to be substantiated and documented 44

45 Going Forward - Domestic Transfer Pricing To Identify and map the relationship between domestic related parties specified u/s 40A(2)(b) Identify and map the SDT Revisit the pricing mechanism applied by the company for SDT applying the most appropriate prescribed methods To implement TP regulations in FY itself although not statutorily required so that systems can be improved for FY To note that variations in profits of tax holiday units for FY 2013 compared to FY 2012 may raise concerns from tax officers. Availability of APA The onus of proving SDT at ALP is on the tax payer 45

46 WAY FORWARD 34 46

47 OECD & UN BEPS : Key areas of Concern 1) Digital Economy 11) Establish methodologies to collect and analyze data on BEPS and the actions to address it 2) Hybrid mismatch arrangements 3) Strengthen CFC rules 4) Limit base erosion via interest deductions and other financial payments 5) Counter harmful tax practices more effectively, taking into account transparency and substance 8, 9 and 10: Assure that transfer pricing outcomes are in line with value creation 8. Intangibles 9. Risks and capital 10. Other high-risk transactions 12) Require taxpayers to disclose their aggressive tax planning arrangements 13) Re-examine transfer pricing documentation 14) Make dispute resolution mechanisms more effective 6) Prevent treaty abuse 15) Develop a multilateral instrument 7) Prevent the artificial avoidance of PE status 47

48 Recent Developments OECD s Automatic Information Exchange Standard A watershed moment for fighting offshore tax evasion? An important step towards achieving greater transparency and ending banking secrecy in tax; Standard provides for annual automatic EOI between governments of financial account information, including balances, interest, dividends etc, reported by financial institutions and covering accounts held by individuals and entities, including trusts and foundations; New consolidated version includes commentary & guidance for implementation by governments & financial institutions, detailed model agreements as well as standards for harmonized technical & information technology solutions; Standard to be formally presented to G20 Finance Ministers at their next meeting in Cairns, Australia, on September 20-21; More than 65 countries & jurisdictions already publicly committed to implementation 48

49 Recent Developments OECD approves the 2014 Update to the OECD Model Tax Convention Changes to Article 26 and its Commentary that were approved by the OECD Council on 17 July Changes also made in Application of Article 17 (Artistes and Sportsmen) of the OECD Model Tax Convention Meaning of beneficial owner Tax treaty issues related to emissions permits and credits Tax treaty treatment of termination payments Indian Tax Department expands its (social) network! In the case of GE Energy Parts Inc, the tax department sought to use social media (Linkedin profiles) to lend support to their contention on the existence of a Permanent Establishment (PE). The Tribunal has also admitted these as evidence and has passed an interim order 49

50 International Taxation : Issues and Challenges General-Anti-Avoidance Rules (GAAR) Direct Tax Code (DTC) Controlled Foreign Corporation (CFC) Thin Capitalization Regulation 50

51 UN Committee of Experts on International Cooperation in Tax Matters Following Subcommittees and Advisory Group have been formed at the 9 th Annual Session of the Committee, October 2013: Article 9 (Associated Enterprises): Transfer Pricing Base Erosion and Profit Shifting Negotiation of Tax Treaties Practical Manual Exchange of Information Extractive Industries Taxation Issues for Developing Countries Tax Treatment of Services Advisory Group on Capacity Development 51

52 Whether the tax policy geared to address the concerns of MNEs? Tax officers (at lower levels) tend to apply domestic tax rules (and approach) unilaterally on international tax issues Differing and often conflicting views of the authorities, policymakers, judiciary and taxpayer Tax Administration and Compliance rules may not follow a business approach - resulting in tax controversies and tax evasion Excessive emphasis on form rather than substance Adversarial attitude of tax administration Conflicting decisions at various levels of dispute resolution forums adds to the complexity of Indian tax laws Uncertainty coupled with substantial period in litigation process 52

53 Are we on the right path and the way forward India s international tax policy is rightly tilted towards source based taxation in sync with the needs of a developing country Increase in scope of source based taxation should take into consideration its effect on inflow of technology/capital A good tax policy with poor implementation is as good or as bad as wrong tax policy with efficient administration Tax policy in the Indian context should also look at the issues of reducing the trust deficit between the taxpayer and tax collector and address issues like simplicity, certainty, accessibility, responsiveness, professionalism, innovation, collaboration and consultation Single pursuit of revenue could stifle business growth MNEs don t mind fair share of tax on their global revenue and appropriate tax allocation amongst jurisdictions remains a key aspect 53

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55 T. P. Ostwal & Associates CHARTERED ACCOUNTANTS 4 th Floor, Bharat House, 104 Mumbai Samachar Marg, fort, MUMBAI Tel No.: Fax No.: Mobile: ostwaltp@gmail.com THANK YOU 55