5 September 2014 Global Tax Alert News from Transfer Pricing EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: http://www.ey.com/gl/en/ Services/Tax/International- Tax/Tax-alert-library#date India releases 2013-14 Annual Report covering transfer pricing and international tax developments Executive summary India s Ministry of Finance (the Ministry) recently released its Annual Report (The Report) which provides an account of various activities undertaken and certain key statistics for the FY 2013-14 including transfer pricing (TP) and international tax developments. The report details progress made towards the Government s commitment in these areas and other accomplishments of the Ministry. The Report provides key information relating to the annual number of cases identified for TP audits, the number of cases in which adjustments were made, tax collections, and the number of cases referred to the Dispute Resolution Panels (DRP). The Report also provides information on the status of India s Advance Pricing Agreement (APA) program. Apart from the TP and international tax controversy scenario in India, the Report also sets forth the various activities and participation of the Ministry on the global tax front. As per the Report, tax transparency, automatic exchange of information, tax base erosion resulting from international tax planning, and the growing importance of intangibles and the digital economy are a few of the issues that have gained primary importance. Detailed discussion The Ministry comprises five Departments which include: i) Department of Economic Affairs; ii) Department of Expenditure; iii) Department of Revenue; iv) Department of Disinvestment; and v) Department of Financial Services. Accordingly, the Report has been divided into five sections in relation to the activities of each of the departments. This Alert summarizes the information relating to the TP and international tax developments under the Ministry s Department of Revenue.
Mutual Agreement Procedure (MAP) and APA program The Report details the progress made by the Indian tax authorities under the MAP and APA program. 1 The number of unilateral and bilateral applications received since the launch of the APA program is as follows: Financial year Unilateral APA applications Bilateral APA applications 2012-13 117 29 2013-14 206 26 The Report also mentions that the Central Board of Direct Taxes (CBDT), India s apex tax administration, has signed five unilateral APAs as of 31 March 2014. A brief overview of meetings with Competent Authorities of various countries includes: One meeting held with the Competent Authorities of the UK in September 2013 wherein a number of MAP cases were resolved and all the bilateral APA applications were discussed. Two meetings held with the Japanese Competent Authority in February 2013 and September 2013. Some MAP cases were resolved and Bilateral APA cases were discussed wherein decision for the exchange of a position paper was agreed between the two countries. A meeting with a high level delegation from the United States, including their Competent Authority held on 9 and 10 September 2013, wherein both sides agreed to expedite the process and decided on measures to be taken for this purpose. Meetings were also held with Swedish Competent Authorities in Stockholm and with officials from the Netherlands and Switzerland in India resolving certain outstanding cases. Further, all requests received for MAP from different countries were taken up by examining the facts and legal question and preparing and exchanging India s position on the matter. MAP processes were initiated on requests received from the Indian taxpayers. Issuance of internal guidance notes on TP To ensure better comprehension and bring about uniformity in the approach followed by the TP Officers, guidance notes were prepared after considering the various judicial interpretations on the issue of TP and international taxation. Eight such guidance notes were issued on the following: Importance of functional analysis in transfer pricing and international taxation dated 26 June 2012 Validity of Reserve Bank of India (RBI) and other Government Organizations regulations and approvals for royalty rate determination using the comparable uncontrolled price (CUP) method under transfer pricing dated 26 July 2012 Transfer pricing aspects of corporate guarantees dated 21 December 2012 Whether economies of scale, i.e., turnover, is a comparability factor dated 21 December 2012 Selection and use of extreme results comparables in the determination of the arm s length price dated 21 December 2012 Transfer pricing issues related to the mining industries dated 31 December 2012 Transfer pricing aspects of royalties issued in April 2013 Taxation of consideration for the use of computer programs as a royalty issued in April 2013 As these are internal guidance notes and are not available in the public domain. 2 Global Tax Alert Transfer pricing
Key statistics relating to controversy, income adjustments and tax collection The Report reveals that the number of TP audits completed during the FY 2013-14 were 3,617 out of which 1,920 (around 53%) resulted in an adjustment grossing INR 596 billion. The annual data relating to the number of cases adjusted and amount of adjustments is as follows: S.No TP audit year Relevant FY No. of TP audits completed No. of adjusted cases % of adjusted cases (rounded) Amount of adjustment (in INR billion) 1 2005-06 2001-02 1,061 239 23 12.20 2 2006-07 2002-03 1,501 337 22 22.87 3 2007-08 2003-04 1,768 471 27 34.32 4 2008-09 2004-05 1,945 754 39 77.54 5 2009-10 2005-06 1,830 813 44 109.08 6 2010-11 2006-07 2,368 1,207 51 241.11 7 2011-12 2007-08 2,638 1,343 51 445.32 8 2012-13 2008-09 3,171 1,686 53 700.16 9 2013-14 2009-10 3,617 1,920 53 596.02 1,015 cases have been filed before the DRP during FY 2013-14 involving an amount of approximately INR 985 billion (out of which around INR 337 billion has been confirmed or ascertained) vis-à-vis 1,070 cases filed before the DRP during the FY 2012-13 involving an amount of INR 803 billion (out of which around 249 billion has been confirmed or ascertained). It is worth noting that though the number of cases filed before the DRP has not seen a significant increase from the year of constitution of the DRP, i.e., FY 2009-10, the amount involved has increased by more than double. In respect of FY 2012-13, the budgeted tax collection under the Principal Chief Commissioner of Income Tax (International Taxation) was INR 284 billion out of which INR 283 billion was actually collected. However, for FY 2013-14, the target was increased to INR 326 billion of which INR 319 billion was actually collected. India and the Base Erosion and Profit Shifting (BEPS) Project India, similar to all other non-member countries of the Organisation for Economic Cooperation and Development (OECD) G20 countries, are involved in the BEPS Project on an equal footing with OECD countries. Indian delegates are attending various meetings of the Working Parties and Focus Groups and are presenting their point of view. India is a member of various focus groups which inter alia include parties involved in preparation of draft reports on artificial avoidance of Permanent Establishment (PE) status, treaty abuse and dispute resolution. In addition, Indian delegates are also contributing to the work of the Task Force on the Digital Economy and the Forum on Harmful Tax Practices. India is also vice chair of the Working Party on Aggressive Tax Planning. Out of the eight non-oecd G20 countries, four countries, i.e., Brazil, China, India and South Africa were elected as members of the Bureau Plus of the Committee of Fiscal Affairs (CFA) of the OECD and thus Indian delegates are participating in making policy decisions in the CFA on issues relating to BEPS. Relationship with the OECD India is one of the few countries which has observer status in the CFA of the OECD. Indian representatives have attended two meetings of the CFA in 2013. Global Tax Alert Transfer pricing 3
Indian representatives have participated in various working party meetings of the OECD during 2013 which inter alia include tax conventions, TP and exchange of information and tax compliance. The Forum on Tax Administration (FTA) was created by the CFA in 2002 and it consists of 43 members, including all G20 countries and select non-oecd countries. This is a forum for cooperation in the areas of tax administration and tax compliance. India has been a member of the bureau of the FTA since 1 January 2012. The Revenue Secretary attended the meeting of the Bureau in May 2013. The OECD has launched a pilot project on Tax Inspectors without Borders (TIWB) with the objective to share tax audit knowledge and skills with tax administrations in developing countries through a real time, learning by doing approach. Indian delegates have attended the meeting for development of TIWB feasibility study. The Ministry also sent officers to various OECD training courses. During the year, more than 52 officers have been sent to various OECD training courses around the world to enhance their professional expertise. Cooperation with Brazil, Russia, India, China and South Africa (BRICS) on tax matters The Heads of Revenue of the BRICS countries met in New Delhi on 17 and 18 January 2013 and held discussions on issues relating to international taxation, TP, prevention of cross-border tax evasion and avoidance, exchange of information, sharing of best practices in tax system administration and dispute resolution. This was the first meeting of the Heads of Revenue and at the conclusion of the meeting, a joint communiqué was issued in which the Revenue Heads of the BRICS countries agreed to develop greater cooperation among their tax administrations on various issues of mutual interest and concerns. The Heads of Revenue of BRICS again met in conjunction with the meeting of Forum on Tax Administrators in Moscow on 17 May, 2013, in which they decided that the areas of cooperation among BRICS countries on both tax and customs matters should be limited to three areas. These three areas of cooperation are (a) Base Erosion and Profit Shifting, (b) Common Approach on International Forum, and (c) I-T Inter Connectivity for Customs Cooperation. United Nations Sub-committee on TP The United Nations has established a Sub-committee on TP with a mandate to develop a Practical Manual on TP for Developing Countries. India is also a member of this Sub-committee and has been actively involved in drafting the TP Manual. The Indian delegate to the UN TP Sub-committee was assigned the responsibility of drafting the Chapter on Comparability Analysis. India also submitted its paper on Emerging Transfer Pricing Challenges in India, which forms part of the UN TP Manual. Implications The Report highlights the continued focus of the Indian tax authorities on the taxation of cross-border transactions and on TP. The focus with which TP is enforced in the country is evidenced by the fact that nearly 53% of audits result in TP adjustments and the significant year-on-year increase in TP adjustments. The Report also indicates taxpayer confidence in the Indian APA program, with nearly 380 applications being filed within two years of the launch of the program. The Report also outlines India s active engagement with the OECD on the BEPS initiative and other matters relating to international taxation. Endnote 1. Refer to EY TP Alert, India publishes rules for implementing Advance Pricing Agreements, dated 4 September 2012 and EY Global Tax Alert, Indian Government releases Advance Pricing Agreement Guidance Booklet, dated 28 May 2013 for more details on the program. 4 Global Tax Alert Transfer pricing
For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (India), New Delhi Vijay Iyer +91 11 6623 3240 vijay.iyer@in.ey.com Ernst & Young LLP (India), Bangalore Rajendra Nayak +91 80 6727 5454 rajendra.nayak@in.ey.com Global Tax Alert Transfer pricing 5
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