Union Budget Fundamental Reforms in Indian Transfer Pricing Regulations. Mumbai Pune Hyderabad New Delhi Chennai Bangalore

Transcription

1 Union Budget Fundamental Reforms in n Transfer Pricing Regulations Mumbai Pune Hyderabad New Delhi Chennai Bangalore 1

2 Budget Transfer Pricing Proposals 1 Roll-back provisions introduced in Advance Pricing Agreements (APAs) 2 Concept of Range introduced for determining Arm s Length Price (ALP) 3 Use of Multiple Year Data 4 Clarification on the definition of Deemed International Transaction 2

3 Roll-back of APA 3

4 Roll-back Provisions Introduced in Advance Pricing Agreements (APAs) After its introduction in 2012, the APA regime in has received a very positive response in terms of number of applications At present the ALP determined under an APA can be applied only to prospective international transactions for a period of five financial years In line with global best practices and to provide a further boost to the APA regime, the government has introduced roll-back provisions in the APA regime which would come into force from 1 October 2014 A roll-back of an APA would allow a taxpayer to apply the ALP/manner of computing the ALP as agreed under the APA for the preceding four financial years as well The conditions, procedures and manner of application of the roll-back provisions are yet to be notified Introduction of the roll-back provisions would surely go a long way to put an end to the longpending litigations Taxpayers can achieve certainty for nine years in a single process 4

5 Roll-back Provisions Introduced in Advance Pricing Agreements (APAs) Overview of roll-back provisions in some key jurisdictions Australia Canada China Japan Netherlands UK USA No formal rules covering roll-back. However, the conclusion made in an APA has a persuasive value for prior year disputes Roll-back only to years which are not under audit. Roll-back provisions are not available for unilateral APAs and small business APAs Roll-back option is available to taxpayers for the period as far back as ten years with specific approvals from tax authorities Roll-back is available only for bilateral APAs Roll-back is available only for bilateral APAs Roll-back to earlier years only for bilateral or multilateral cases If the taxpayer is requesting a roll-back for unresolved issues which are under Appeals, the taxpayer must include with its APA request a waiver of its right to be present during communications between the Appeals Office and the APA team members 5

6 Range Concept 6

7 Concept of Range Introduced for Determining Arm s Length Price (ALP) Existing provisions When more than one ALP is determined, the ALP would be the arithmetic mean of such values. In case of any of the profit-based methods, arithmetic mean of the margin of comparable companies is considered to derive the ALP. Benefit of tolerance band of 3% is available to the taxpayer. Proposed provisions The taxpayer s result would be at arm s length if they fall within the range of results of comparables However, arithmetic mean would be continued to be used especially in cases where there are inadequate comparables Circumstances in which range or arithmetic mean can be used would be clarified later Whether the range would mean full range or inter-quartile range would be clarified in the due course Arithmetic mean is not an exact representative of a set of comparables as extreme results have a greater influence on the mean n tribunals/courts have held that merely because a comparable reports an extreme result it cannot be excluded from the set of comparables so long as it is functionally similar. However, with the introduction of range as a comparable, hardship of this nature is expected to reduce. The range concept has been accepted by the Organisation for Economic Co-operation and Development (OECD), the United Nations (UN) and other jurisdictions globally including USA, Canada, South Africa, Netherlands, France, UK, etc. Using a range to determine ALP brings out economic realities and is a better representative of an ALP as prices/profits are compared to those within a range Using a range is a step towards aligning with global best practices and would eventually result in reducing litigation 7

8 Multiple Year Data 8

9 Allowing the Use of Multiple Year Data At present, n transfer pricing regulations stipulate the use of single year data (the year in which the international transaction is entered into), with the use of multiple year data only in exceptional cases. Tax authorities and tribunals/courts have consistently rejected multiple year data since taxpayers are not able to demonstrate reasons for the use of the same The government has now introduced the concept of using multiple year data in order to determine the arm s length price It enables better harmonisation of the data which in turn averages out the results over a period of time A welcome move to align with global best practices It also accounts for any abnormal economic circumstances such as strikes or other favourable/adverse conditions and economic or industry cycles Clarifications regarding the following are awaited so as to implement the multiple year data concept The period for which data can be used Method of using the multiple year data Method of applying the filters while selection of comparables 9

10 Deemed International Transaction 10

11 Clarification on the Definition of Deemed International Transaction A transaction between an entity and a third party where the terms in substance are determined by an Associated Enterprise (AE) of the entity is deemed to be an international transaction. Transactions between two n entities was out of the purview of the definition of a deemed international transaction. It is proposed to amend the existing provision to include transactions between n entities within the ambit of deemed international transaction. The proposed amendment will come into effect from 1 April

12 Clarification on the Definition of Deemed International Transaction (contd.) Foreign Co. USA Terms of Sale Foreign Co. is dealing in Product A n Co. is a contract manufacturer for the Foreign Co., which is its parent company n Co. has entered into a transaction to sell the said Product A to a Third Party Customer The terms of sale with respect to the quality of the product, price, etc. have been in decided in principle between the Third Party Customer and Foreign Co. The transaction between the n Co. and Third Party Customer would now fall within the ambit of a deemed international transaction n Co (AE of Foreign Co.) Sale of Product A Third Party Customer 12

13 Clarification on the Definition of Deemed International Transaction (contd.) Foreign Co. 1 Sale of Global Business (incl. ) Foreign Co. 2 Foreign Co. 1 is a 100% shareholder of the n Co. 1 Foreign Co. 2 is a 100% shareholder of the n Co. 2 Hence, Foreign Co. 1 and n Co. 1 are AEs and Foreign Co. 2 and n Co. 2 are AEs Foreign Co. 1 has agreed to sell one of its global businesses, which is run through its subsidiaries including n Co. 1, to Foreign Co. 2 USA As per the agreement, the subsidiary of Foreign Co. 1 has to sell its business to the subsidiary of Foreign Co. 2 Pursuant to the global arrangement, n Co. 1 transfers its business to n Co. 2 The terms of agreement between n Co. 1 and n Co. 2 depends largely upon the global arrangement n Co. 1 Sale of Undertaking n Co. 2 Therefore, the transaction between n Co. 1 and n Co. 2 would fall within the ambit of deemed international transaction 13

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