Transfer Pricing Audits Indian experience.

Transcription

1 Transfer Pricing Audits Indian experience. International Tax Conference Vispi T. Patel Deloitte Haskins & Sells.

2 Background of Indian TPR

3 OECD s View Transfer pricing can deprive governments of their fair share of taxes from global corporations and expose multinationals to possible double taxation. No country poor, emerging or wealthy wants its tax base to suffer because of transfer pricing. The arm s length principle can help. By John Neighbour OECD Centre for Tax Policy and Administration

4 Indian Revenues views Rationale for TP - To provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits for being taxed in India Intention - To prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the country s tax base Primary onus to determine ALP is on the assessee - No intervention by AO where onus is discharged and data is reliable and correct No correlative adjustment to non-resident s income - Adoption of ALP would not alter commercial reality No downward adjustment

5 Audit Scenario Internatio

6 Global TP Rules & Enforcement 1996 & Prior 1997/ / / /2004 Japan Italy New Zealand Mexico Korea France Czech Republic Spain Australia South Africa USA China Slovakia Brazil Japan Italy New Zealand Mexico Korea France Czech Republic Spain Australia South Africa USA Germany Kazakhstan Russia Denmark Belgium Venezuela Argentina Canada UK China Slovakia Brazil Japan Italy New Zealand Mexico Korea France Czech Republic Spain Australia South Africa USA Thailand Portugal Poland Peru India Netherlands Germany Kazakhstan Russia Denmark Belgium Venezuela Argentina Canada UK China Slovakia Brazil Japan Italy New Zealand Mexico Korea France Czech Republic Spain Australia South Africa USA Hungary Colombia Malaysia Thailand Portugal Poland Peru India Netherlands Germany Kazakhstan Russia Denmark Belgium Venezuela Argentina Canada UK China Slovakia Brazil Japan Italy New Zealand Mexico Korea France Czech Republic Spain Australia South Africa USA

7 The Indian Perspective

8 India: TP Administration Structure DGIT, International Taxation Director of Income-tax, Transfer Pricing (Each location) TPO I TPO II TPO III Additional Commissioner of Income-tax Additional Commissioner of Income-tax Additional Commissioner of Income-tax Support staff

9 Reference Procedure Commissioner Approval Assessing Officer Reference Transfer Pricing Officer Notice Assessee Assessing Officer s To proceed to compute Income of Asessee Transfer Pricing Officer s order Documents& Information

10 Assesse s Focus- Managing Transfer Pricing Risk Documentation the end result of a strategic and compliance focused exercise Evaluation of the internal methodology of an MNE for transferring goods, services, intangibles etc. Aims to demonstrate that the intra-group dealings are comparable to transactions by independent parties either at transactional, functional or factor level

11 Revenue s Focus To understand the Asessee s business - the industry in which it operates - its holding structure - its organizational structure - the functional profile of the various business activities - the internal pricing mechanism Evaluation - of the business strategies and their effect on the financial results of the benchmarking progress, it s overall correctness and fairness as depicted by the Asessee

12 India: Experiences from first year of audit Major companies audited (approx 1000 audits) Only selection criteria - international transactions above USD 1.1 million Adjustments USD 230 million TNMM method most commonly used by tax payers More focussed audits in future years

13 The Issues arising from Transfer Pricing Audit

14 Documentation Issues Depiction of the organisition s Functional Profile of utmost importance Economic Analysis reflects the economics of the business activities.the Revenue Authorities have to accept the contradistinctions, i.e. underlying differences in regulatory financial account filing and Economic Analysis Functional benchmarking vs Whole entity analysis

15 The Foundation. Business Function Intangibles/ Risks Management Structure/ Processes Economic Analysis Economic Profiling Comparable Strategy Most Appropriate Method

16 Documentation Issues.. Difficulty faced by small taxpayers in maintaining documentation Revenue insisted on the qualitative aspects, e.g. requiring taxpayer to demonstrate negotiation, independence in their dealings with related parties Huge amount of transaction details asked Intra Group policy for intangibles, services etc, a qualitative analysis Intra Group service agreements importance stressed

17 Comparable Issues Search Processes - to be properly documented - reasons for rejecting comparables critical The cut off date of the Process Databases to be used Information of AE limitations due to commercial and other limitations

18 Comparable Issues.. The important thing is that the Revenue has to test the transactions of the Indian entity, for which complete data is available Dependence on foreign CPA certificate Secret Comparables

19 Methodology Issues TNMM v/s CUP Special considerations to be accepted by Revenue, if they reflect true commercial behavior Internal comparables the onus on Assessee to document their comparability or rejection Preference for CUPs Geographical differences not stressed Industry rates as benchmarks in IT / Chemical Sector

20 Methodology.. Acceptability of TNMM reluctantly (Product Vs. Functional Comparability) Selective application of CUP, even though the taxpayer has benchmarked his IT by applying another method Application of CUP to controlled transactions Distributor with losses entrepreneurial risk not acceptable Requests for Global TP Policies

21 Services/Intangibles/Financial Transactions Consideration for services rendered by Indian entity (R&D, Marketing, Technical, etc.) Benefit Test critical for --Intra group service charges --Inbound intangibles (know-how, brand name, etc.) Loan transactions, etc.

22 Issues on Arithmetic Mean v/s Range

23 Arm s Length Price with Option of +/- 5% Operating margin: TP INR/% Sales 100 Purchases (IT) 90 Profit 10 OM 10 Comp s OM 12 Working of ALP(IT) Sales- Comp s OM = 88 ALP range 88+/-5% =83.60 to IT 90, thus at arm s length

24 ALP-Quantum of Adjustment? If comp s OM 15%, then Working of ALP(IT) Sales - Comp s OM = 85 ALP range 85+/-5% =80.75 to IT 90, thus adjustment is (90-85=5) OR ( =0.25)??

25 What to do after an unfavorable assessment. Competent Authority or Appeals ----Will the experience be different?

26 Dispute.. Appellate Process Appeal lies before Commissioner (Appeals) Advantage Simplicity of process Disadvantages Absence of dedicated transfer pricing appellate cell Formal training needed

27 MAP Process Dispute.. Reference to Competent Authority (CA) by AE in its home country CA in India to call and examine the records Resolution through MAP by consultation of CA Resolution to give effect to MAP award, if the assessee gives acceptance to resolution Withdraws regular appeal Simultaneous defense a possible option

28 Risk Analysis and TP

29 New Age Business Evolution The transformation in the way multinational / global companies operate TELECOMMUNICATION CONNECTIVITY Slicing of Business Activities Change in business dynamics Birth of varied business structures Ability to remotely do part of the BA at various places Outsourcing has thrown up methods to distinguish functions from risk

30 Typical Business models India's growing importance as the knowledge center of the world Software service providers IT enabled services R & D centers Captive service units Contract manufacturers

31 Risk Exposure vis-à-vis Economic Activity Complex & Simple

32 THANK YOU QUESTIONS