Future of TP Documentation & Certification 7th October 2017 Presented by- CA Dilip Gupta
Journey of TP regulations in India Major Milestones Final Rules on Range and multiple year data concept Introduction of Three tier documentation [Finance Act,2016] Introduced in Finance Act 2001 Reference to DRP [Finance Act (No.2) 2009] Change in computation of +/- 5% range [Finance Act (No.2) 2009] APA Rules Finance Act, 2012 Power of TPO to analyze any other transaction not specifically referred [Finance Act, 2011] Safe Harbour rules 2013 Oct 2015 India s active participation in BEPS Slide 2
NUMBER OF TP CASES TP ADJUSTMENT IN USD MN Audit & adjustment trends 5,000 12,000 4,500 4,000 10,000 3,500 3,000 8,000 2,500 6,000 2,000 1,500 4,000 1,000 500 2,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 TP audits conducted TP audits adjusted TP adjustments (in USD mn) 0 Slide 3
Audit & adjustment trends India contributes to more than 70% of the TP global disputes (in numbers). Actual collection of taxes on TP adjustments..???? * Source: Government of India Annual Report 2014-15 Slide 4
New TP documentation regime-finance Act 2016 Provides aggregated financial and tax data by tax jurisdiction to facilitate risk assessments [Section 286 and Rule 10DB] Provides more detailed information relating to specific intercompany transactions. [Section 92D and Rule 10D] Provides a complete picture of the MNE s global operations [Section 92D(1 & 4) and Rule 10DA] Slide 5 Slide 5
OECD BEPS Action Plan 13 Slide 6
Audit & adjustment trends India contributes to more than 70% of the TP global disputes (in numbers). Actual collection of taxes on TP adjustments..???? * Source: Government of India Annual Report 2014-15 Slide 7
Applicability- Masterfile Criteria Compliance requirement and Form Due date 1) Group consolidated revenue >INR 500 Crs during the preceding accounting year AND 2) Constituent Entity has international RPT >50 Crs during reporting year OR Transactions in respect of Intangible Property > INR 10 crores during reporting year. Constituent entity meeting above criteria: furnish all details in Part A and Part B of Form 3CEBA Indian subsidiary of Foreign MNE group: Notification in Form 3CEBE All other constituent entities of international group: Furnish Part A of Form 3CEBA Form 3CEBA - Due date of filing the return of Income (FY 2016-17: 31 st March 2018) Form 3CEBE- 30 days before the due date of filing of return of income- FY 2016-17?? Prescribed authority DGIT (Risk assessment) Slide 8 Slide 8
Applicability- CbCR Criteria Compliance requirement Due date Prescribed authority Group consolidated revenue >INR 5500 CRs during the preceding accounting year Parent entity resident in India; or Alternate reporting entity resident in India; or Constituent entity of an International Group resident in India, but only in following exceptional situations: Parent entity is resident of a country with which India does not have an agreement providing for exchange of the report There has been a systemic failure of the country or territory and the said failure has been intimated by the prescribed authority to such constituent entity Parent Entity/ Alternate Reporting Entity to furnish details in Form 3CEBC Constituent Entity of a non-resident parent to notify in Form 3CEBB whether it is the alternate reporting entity / details of parent/ alternate reporting entity In case of more than one constituent entity notification for the designated entity in Form 3CEBD Form 3CEBC - Due date of filing the return of Income Form 3CEBB- 60 days before the due date of filing of return of income- FY 2016-17?? DGIT (Risk assessment) Slide 9
Penalties for non-compliance S. No. Default Penalty (a) (b) (c) (d) (e) Non- furnishing of CbCR and the failure continues for a month Non-furnishing of CbCR failure continues beyond a period of one month Non-furnishing CbCR even after levy of penalty based on (a) or (b) above Non submission of information called for in relation to CbCR Non submission of information called for in relation to CbCR even after levy of penalty based on (d) above INR 5,000 per day of default INR 15,000 per day of default INR 50,000 per day of default INR 5,000 per day of default INR 50,000 per day of default (f) Furnishing of inaccurate information / document INR 500,000 (g) Failure to furnish the Master File INR 500,000 Slide 10
Master file- information & details Master file requirements Organisational structure OECD BEPS AP 13 Rule 10D Draft Rule 10DA Legal & ownership structure & geographical locations Description of MNE s business Important drivers of business Group supply chain and main geographic markets Important service agreements between group (except R&D) Contribution to value creation by entities within group Business restructuring transactions (e.g., M&A) MNE's intangibles Ownership, use and location + strategy for development Transfer pricing policies related to R&D & intangibles Any transfers of intangibles among associated enterprises MNE s intercompany financial activities Group financing, related and third-party Transfer pricing policies related to financing arrangements MNE s financial and tax positions Group's annual consolidated financial statement for financial year Group s existing unilateral APAs and tax rulings related to the allocation of income between jurisdictions Slide 11
Local TP documentation Determination of arm s length price Comparability adjustments Calculation of arm s length range Review method Quantitative and qualitative analysis Search for uncontrolled internal or external comparables Review of comparables Characterization of Tested Party and Choice of Most Appropriate Method Group Overview Functional Analysis Industry Overview Slide 12
Most Appropriate Method Method CUP RPM CPM PSM TNMM Other Transaction Type Loans, Royalties, Service fee, transfer of tangibles, guarantee fees Marketing operations of finished products, where distributor does not performing significant value addition to product Sale of finished / semi-finished goods or services Transactions involving provision of integrated services by more than one enterprise or involving unique intangibles Provision of services, manufacture / distribution of finished goods Purchase of second hand capital goods involving chartered engineer s certificates, buy-back of shares as per the valuation report of independent accountants Slide 13
Economic Analysis- TP methods Methods Comparability Requirements Approach Practical Applicability CUP Very High Prices are benchmarked Low RPM High Gross margins are benchmarked Low CPM High Gross margins are benchmarked Low PSM High Split of profit using contribution/residual approach Low TNMM Medium Operating margins are benchmarked High Other High Prices charged / proposed to be charged For selected transactions Slide 14
Penal consequences Sr. No. Type of penalty Penalty quantified 1 Failure to maintain documents; Failure to report a transaction in the accountant's report; or Maintaining or furnishing incorrect information or documents 2% of the value of transaction 2 Failure to furnish documents 2% of the value of transaction 3 Failure to furnish Form 3CEB by due date INR 100,000 4 In case of a transfer pricing adjustment, where - There is under-reporting of income Under-reporting of income is in consequence of any misreporting 50% of tax on the adjusted amount 200% of tax on the adjusted amount Slide 15
TP Certification
Accountant s Report Obtained by every person entering into an international transaction / specified domestic transaction ( SDT ) Applies both to residents and non- residents No exemption from filing Form 3CEB - Even if the Assessee has entered into international transactions of INR 1, Form 3CEB must be filed For SDTs, reporting is mandatory if the aggregate value of such transactions exceeds INR 20 Crores Opinion whether prescribed documents have been maintained and the particulars in the report are true and correct To be filed by the due date for filing return of income An important document for the Assessing officer Contains summary of international transactions/ SDTs Contains certain details of the taxpayer Contains method employed to determine ALP Slide 17
Taxpayer s Responsibilities Identify all international transactions / SDT during the year with AEs / related party Approve the Form No. 3CEB uploaded online by the Accountant as a final step towards filing of e-form Taxpayer s responsibility Compute the ALP as per Section 92C Furnish completed Annexure to Form No. 3CEB to Accountant Collate, maintain information / documentation prescribed u/s 92D Slide 18
Accountant s Responsibilities Reconcile transactions Smell test Document review and test-check Responsibilities Comparison Collate documents Slide 19
Accountant s Report Form 3CEB of the AEs When We Need To File Form 3CEB For Foreign Companies? Mirror Form 3CEB Payments made by the foreign affiliate (i.e. Income of the Indian entity) need not be disclosed Further only taxable income in the hands of the foreign affiliate is to be disclosed refer section 115A; Return of Income of the Foreign company would be the starting point Slide 20
Clause 11: Tangible property transactions Particulars Quantitative details Goods in Transit Other Points for Consideration Classification/ Grouping to be consistent with client s statutory accounts/ tax audit; In case of no details available in client s statutory accounts/tax audit report or non availability of quantitative details then a note needs to be inserted. Since transactions for the year are considered, impact of Goods in Transit is considered in relevant year; Closing Goods in Transit to be included and opening Goods in Transit to be excluded. Following note to be inserted Includes stock in transit as on March 31, 2XXX. Verification Procedures to include scanning through custom valuations; group s standard pricing policy; For purchase of capital asset- Third party back up invoices; Valuation Reports in case of used asset; Pricing policy in case of proprietary assets In case subvention income is received by the Client, the same needs to be reported separately under Clause 19. Key Consideration: Goods in transit! Slide 21
Clause 12: Intangible property transactions Particulars Flipside Form 3CEBs Others Points for Consideration In case where royalty/ technical know how is paid by client to its overseas related party in that case, filing of flip side Form 3CEB of the overseas entity basis their accounting practice (accrual or cash) needs to be ensured; Consistency in selecting the most appropriate method in both the Form 3CEBs. Verification procedures to include analysis of Valuation report in case of purchase/ sale of intangibles; Basis of determination of royalty rate; Internal comparables if any for CUP analysis. Slide 22
Clause 13: Service transactions Particulars Transactions Covered Points for Consideration Transactions pertaining to provision and receipt of services; Understanding of nature of transaction to be established; Ensure reimbursements are not captured under this clause; In case of composite contracts involving services and materials and the individual portions are indivisible, the details of such contracts have to be included under clause 11 and not this clause. Key Consideration: Reporting requirements for AMP expenses incurred by Indian entities! Slide 23
Clause 14: Lending or borrowing of money including any type of advance, payments, deferred payments, receivable, non-convertible preference shares / debentures or any other debt arising during the course of business Particulars Transactions Covered Key Check Points Flipside Form 3CEBs Points for Consideration Interest payments/ receipts on loans, compulsorily convertible debentures; Interest on overdue receivables/ payables ; Issue of debentures; Other Capital financing transactions. Verification procedures to include terms of borrowing, external comparables including Prime lending rate ( PLR ), LIBOR/ EURIBOR, deposit rates etc. In case where interest is paid by client to its overseas related party in that case, filing of flip side Form 3CEB of the overseas entity basis their accounting practice (accrual or cash) needs to be ensured; Consistency in selecting the most appropriate method in both the Form 3CEBs. Key Consideration: Reporting requirements for trade receivable/payables! Slide 24
Clause 15: International transaction(s) in respect of guarantee Particulars Transactions Covered Key Check Points Points for Consideration Determination of whether the guarantee provided by client to its AEs can be classified as quasi equity; Explicit Guarantee provided to or received from associated enterprises; In case no guarantee fee is charged, transaction must be reported with 0 book value. Reconciliation with expenditure/ earnings in foreign currency; Reconcile the figure with profit and loss account; Verification procedure to include confirmations from client on guarantees provided to related parties for which no charge is being received. Slide 25
Clause 16: Purchase or sale of marketable securities or issue and buy back of equity shares, optionally convertible/ partially convertible / compulsorily convertible debentures/ preference shares: Particulars Transactions Reported Key Check Points Points for Consideration Though no income arises, transaction pertaining to issue of shares to be reported on account of specific clause; Any issue of shares whether initial or subsequent is required to be reported; Transactions like conversion of loan into equity shares do not trigger TP provisions since no income arises from the said transaction. Transaction value to include share premium; In case of initial issue, reference of RBI circular for investments by non resident at face value to substantiate the transaction value; In case of subsequent issues, valuation report capturing the valuation methodology can be used to substantiate the transaction value; Board resolution and board minutes. Key Consideration: Whether issue of equity shares ought to be reported in Form 3CEB? Slide 26
Clause 17: Particulars in respect of mutual agreement/ arrangement: Particulars Transactions covered Key check points Points for Consideration Transactions where costs/ services are pooled/ centralized like Management services/ Intra Group services; CUP can be considered as the most appropriate method to benchmark the transaction if allocations are on cost to cost basis; In case where allocations are with a mark-up then the same would be disclosed under Clause 13. Allocation methodology and components of cost base allocated; Independent auditor certifying the cost allocations as per the allocation methodology; Documentary evidence to demonstrate the benefit received on account of charge paid; Impact of true ups and true downs. Key Consideration: Details of the agreement and terms of the services! Slide 27
Clause 18: Particulars in respect of transactions arising due to business restructuring or reorganisations: Particulars Transactions covered Key check points Points for Consideration Transactions in the nature of transfer of intangibles; termination/ renegotiation of existing arrangements; internal reallocation of FAR within group; specialization/ de-specialization of operations/ downsizing/ closing of operations. Verification of basis of restructuring, profitability of AE/ non AE before restructuring etc. Key Consideration: Details of the agreement and terms of the business restructuring / reorganization! Slide 28
Clause 19: Any other international transaction(s) including a transaction having a bearing on the profits, income, losses or asset but not specifically referred to above, with associated enterprises: Particulars Transactions covered Key check points Points for Consideration Residuary clause to cover international related party transactions not specifically covered by any other clause like reimbursements and recovery of expenses; Nature of reimbursements to be analysed to ensure no services are being captured under this clause. All pass through expenses must be supported by third party bills; Verification of back-up documents to confirm the nature of transaction is only for administrative convenience. Slide 29
Clause 20: Any transaction with a person other than an AE in pursuance of a prior agreement in relation to the relevant transaction between such other person and the associated enterprise Particulars Transactions covered Points for Consideration Identification of all existing arrangements with third parties; Basis of pricing, evidence of commercial negotiations with third party, documents substantiating selection of third party vendor backup documents etc.to be verified; Applicability in case of Four Party scenario, Key Consideration: Wide coverage of deemed international transaction! Slide 30
Clause 23a and 23b Clause 23a: Specified domestic transaction(s) in the nature of transfer or acquisition of any goods or services by an undertaking or unit or enterprise or eligible business of the assessee [as referred to in section 80A(6), 80IA(8) or section 10AA)] to any other business carried on by the assesse & Clause 23b: Specified domestic transaction(s) in the nature of transfer or acquisition of any goods or services by an undertaking or unit or enterprise or eligible business of the assessee [as referred to in section 80A(6), 80IA(8) or section 10AA] from another business of the assessee Particulars Transaction covered Points for Consideration Tax holiday units covering inter-unit transfer of goods/ receipts or provision of services/ purchase or sale of capital assets or any other income or expense transaction that impacts tax holiday units profits. Key Consideration: Inter-unit transfers covered! Slide 31
Clause 24 Specified domestic transaction (s) in the nature of any business transacted which has resulted in more than ordinary profits to an eligible business to which section 80IA(10) or section 10AA applies Particulars Transaction covered Key check points Points for Consideration Any transaction where eligible business with any other person generates more than ordinary profits owing to either close connection or any other reason. The clause covers reporting from both income and expense perspective. Practically in such a case the transaction may not be at arm s length and the decision to report under this needs to be deliberated and discussed. Particulars AS-18 40A(2)(b) 92A(2) Close Connection Voting Power >50% >=20% >=26% Direct or indirect holding Directors Key Suppliers Both Direct Both Key Managerial Personnel Specifically excluded Directors Not covered Not covered More than 90% supplies Slide 32
Clause 25- Any other specified domestic transaction(s) not specifically referred to above in any other clauses, with an associated enterprise Particulars Transactions Covered Points for Consideration This residual clause is to cover transactions which may be prescribed per Section 92BA(vi); Section 92BA (vi) states as under any other transaction as may be prescribed ; As there are no transactions which have been prescribed till date, this clause has to be replied by stating a No. Slide 33
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