Transfer pricing for Specified Domestic Transactions

Transcription

1 Transfer pricing for Specified Domestic Transactions

2 Introduction Since the introduction of Transfer Pricing (TP) provisions in India in 2001, the provisions have applied to international transactions only. The Finance Act 2012 (after the apex court decision in the case of Glaxo Smith Kline ([2010] 195 Taxman 35)) has extended the scope of TP provisions to cover Specified Domestic Transactions (SDT), with effect from FY12 13, if the aggregate value of such transactions exceeds INR50 million in the relevant financial year. Finance Act 2015 has revised the threshold to INR200 million with effect from financial year beginning 1 April By extending TP provisions to SDT, pricing of these transactions will need to be determined with regard to arm s length principles using methods prescribed under Indian TP regulations. The TP provisions seek to create legally enforceable obligation on the taxpayer to maintain prescribed documentation. The TP provisions applicable to international transactions are largely applicable to SDT as well, with the exception of APA provisions. SDT includes any of the following transaction(s), which are not international transactions: Payments to related parties (as defined under section 40A(2) (b)); Inter-unit transfer of goods or services of profit linked, tax holiday-eligible units with other units of the taxpayer; Transactions of profit-linked, tax holiday-eligible units with other closely connected entities ; Any other transaction as may be notified by the Central Board of Direct Taxes TP for International transactions vis-à-vis domestic transactions: Particulars TP for International Transactions TP for Domestic Transactions Threshold for TP documentation compliance 10 million 50 million till FY14 15; 200 million from FY15 16 Related party coverage Exhaustive coverage comprising common management, capital or Specified under Sec 40A(2)(b) and persons with close connection with taxpayer claiming tax holiday benefit control APA eligibility Yes No Safe Harbour eligibility Yes for specified transactions Only for government companies engaged in the business of generation, transmission or distribution of electricity Transactions covered Exhaustive Only payments to related parties and exhaustive for all tax holiday claiming units 2 Companies Act

3 Coverage of persons u/s 40A(2)(b): The scope of the relations or associations covered as per the Domestic TP Provisions is exhaustive and is illustrated below: Individual Individual (A) holding > 20% Firm holding >20% AOP holding >20% HUF holding >20% Company in which A is Director AOP in which A is Member Firm in which A is Partner HUF in which A is member Partner Member Member Other directors Other members Other partners Other members partner member member other directors other members other partner other members director Director Company holding >20% (HCo) Director Director Any entity in which relative holds > 20% Any entity in which Director holds > 20% Taxpayer company Any entity in which Taxpayer holds > 20% Company in which HCo holds >20%

4 Tax holiday Eligible units/industries: Special Economic Zone (SEZ) units and industrial park. Infrastructure developers and operators such as roads, ports, water supply projects. Telecommunication service providers Power generators or distributors Mineral oil refinery and production of natural gas Industrial undertaking in certain states and north eastern states Scientific and industrial R&D companies Processing of fruits, vegetables or meat products and integrated handling storage and transportation of food grains Operation and maintenance of hospitals in certain areas 2/3/4* hotels at a world heritage site 4 Companies Act

5 Related party payments likely to be subject to detailed scrutiny to assess whether payments are consistent with ALP Adjustments could lead to double taxation in the absence of correlative relief Inter-unit arrangements may be reviewed to assess reasonableness of tax holiday eligible profits Profit levels of tax holiday eligible taxpayers may be evaluated to assess whether more than ordinary profits are derived on account of dealings with closely connected persons Benchmarking directors remuneration, allocation of common cost/management and head office expenditures etc. Documentation/compliance and reporting obligation on taxpayer Assessment of transactions by specialized transfer pricing officers Penal consequences for non-compliances and adjustments Implications and Challenges How EY can help Determining the applicability of TP on related party transactions and identifying SDT, considering economic and legal criteria Designing of tax-efficient solutions and mitigating risk of tax penalties Assisting in maintaining documentation to comply with TP regulations and avoid penalties Assisting in undertaking compliance with the TP provisions Identifying possible risk areas and assistance in preparing a defence against potential future inquiries from revenue authorities Assisting in developing and implementing a related-party transaction policy At EY, we have a team of tax and transfer pricing professionals who can provide their advice and assistance on these matters. We offer a diverse set of services to meet your transfer pricing needs.

6 Benefits for your Organisation Undertaking a timely risk assessment of the inter-company or inter-unit policies adopted b your company Understanding and being aware of TP provisions and their impact on SDT Enabling operational efficiencies by business restructuring and optimizing your company s tax outflow Ensuring statutory compliance with India s Income Tax laws Providing access to reports that may help your management conduct a review of the organization Preventing tax penalties for not maintaining prescribed documentation Formulating robust documentation to present to the tax authority at the time of assessment Providing minimal resource requirement for your company to address the provisions. 6 Companies Act

7 Determining global policy and implementation assistance Impact analysis of OECD BEPS developments Business Restructuring Evaluation of alternative business structures/ models Representation before tax and appellate authorities Controversy Management and resolution Monitoring, and risk management Transfer Pricing Services BEPS Strategy, design and planning Intercompany effectiveness solutions Assistance in APA and competent authority negotiations Compliances Study, documentation, and reporting Supply chain tax optimization

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