 "Tackling transfer pricing")
Avoid delay in filing TP documentation: Vijay Iyer
Transfer Pricing (TP) has become one of the most litigated tax issues in India, influencing investment decisions of multinationals.
Taxpayers are advised to evaluate the impact of recent jurisprudence on their TP risk profile and identify a strategy to deal with potential controversy. High risk cases involve outbound guarantee/loans, intra-group services, royalty payments, loss-making companies, IT/ITES companies with net profit margins lower than safe harbour limits, advertising spend, business restructuring, and overdue receivables.
During audits, taxpayers often struggle to produce documents.
While TP reports are based on financial data of comparable companies the TPOs update the analysis with financial data that became available subsequently. This 'freshly' available data could lead to different conclusions from the ones drawn in the TP documentation. Suo-moto updation of such data and impact analysis thereof should be an important part of audit preparation.
Taxpayers may contemplate using avenues like Advance Pricing Agreement to mitigate audit risk.
The controversy surrounding tax notice of Rs 10,000 crore to Cairn Energy PLC is a downer for the already dwindling confidence for new investments.
While there is little room in the Indian Income-tax law for Cairn Energy to plead that it is not liable to tax as the retrospective amendment for taxing indirect transaction persists under the law, the fate of Cairn India, the acquirer of shares, is even worse as notices have been issued in respect of non-deduction of tax.
It is already news that Cairn Energy has moved for arbitration under the India-UK Investment Protection treaty. The other cases that would be pursued under this law (36) may also choose to pursue arbitration, as the only recourse left to them.
It is the most likely that the arbitration's outcome would cause embarrassment to India. It is arguable that India cannot impose retrospective tax for investments. While the tax and arbitration proceedings may take a while to resolve, it is India that is taking a beating in all situations.
The Vodafone controversy first erupted in March 2007 and the Indian government realised that here is a tax loophole that is being exploited by foreign investors. It dragged its feet for five years before bringing an amendment to the law and that too with retrospective effect. If the government was serious in taxing such transactions, the wait of five years deprived India of tax revenues from such transactions for little reason.
The continued inability to efficiently collect tax from such transactions and hackles that are getting raised on this issue time and again, demonstrates that India is neither able to collect taxes from such transactions but also creating a poor investment sentiments that in the past denied Foreign Direct Investments (FDI) in India to its potential and would continue to do so even in the future. Even now it is not too late to amend the law and remove retrospectivity in the law to avoid further embarrassment.
Corporates need tax certainty to focus on their business.
On transfer pricing (TP), a sore point for multinationals, the options are limited - pursue lengthy litigation battles, devise counter strategy, surrender to the aggressive tax authorities or negotiate certainty through Advance Pricing Agreement (APA) introduced in 2012.
This is a subject involving complex facts. It requires the application of varied economic principles. This may often result in subjective opinions.
The much-debated TP-vexed issue of Advertising, Marketing and Promotion (AMP), doing the rounds of high courts and the Income Tax Appellate Tribunal (ITAT) now is the prime example of this uncertainty.
Many perceive the outcome to be the litigation circle getting bigger with no end in sight.
The Delhi High Court ruled distribution and marketing to be closely related and could be analysed as bubbled transactions. So, the compensation for AMP need not be benchmarked separately.
The court emphasised cases need to be dealt with on a fact-specific manner and has now remanded the matter back to the ITAT.
Though the court's principles seem reasonable, interpreting and implementing will require considerable effort and time from both sides.
These are trying times for the government as well.
While it should not let go of what is its rightfully, given the long-drawn litigations, even the government would not be able to achieve certainty on their tax collections.
More importantly, they would also need to avert the risk of getting dragged to court and losing there. The share-premium TP controversy, recently put to rest by the Bombay High Court, is a glaring example where the government finally had to let go of its aggressive stand.
APA seems to be a win-win way forward for both corporates and the government in most of the cases. Now with the APA rollback procedure in place, taxpayers can look at achieving certainty for nine years at once. This includes four prior years and five future years.
Companies need to be proactive and keep ready robust documentation to justify their transfer pricing positions.
Apart from the APA rollback, one could consider the MAP as an effective option to settle existing transfer pricing disputes. MAP is an option provided under Double Taxation Avoidance Agreements that India has with many other countries.
Transfer Pricing (TP) has become one of the most litigated tax issues in India, influencing investment decisions of multinationals.
Taxpayers are advised to evaluate the impact of recent jurisprudence on their TP risk profile and identify a strategy to deal with potential controversy. High risk cases involve outbound guarantee/loans, intra-group services, royalty payments, loss-making companies, IT/ITES companies with net profit margins lower than safe harbour limits, advertising spend, business restructuring, and overdue receivables.
During audits, taxpayers often struggle to produce documents.
While TP reports are based on financial data of comparable companies the TPOs update the analysis with financial data that became available subsequently. This 'freshly' available data could lead to different conclusions from the ones drawn in the TP documentation. Suo-moto updation of such data and impact analysis thereof should be an important part of audit preparation.
Taxpayers may contemplate using avenues like Advance Pricing Agreement to mitigate audit risk.
Vijay Iyer
Partner & National Leader - Transfer Pricing, EY India
Partner & National Leader - Transfer Pricing, EY India
The controversy surrounding tax notice of Rs 10,000 crore to Cairn Energy PLC is a downer for the already dwindling confidence for new investments.
While there is little room in the Indian Income-tax law for Cairn Energy to plead that it is not liable to tax as the retrospective amendment for taxing indirect transaction persists under the law, the fate of Cairn India, the acquirer of shares, is even worse as notices have been issued in respect of non-deduction of tax.
It is already news that Cairn Energy has moved for arbitration under the India-UK Investment Protection treaty. The other cases that would be pursued under this law (36) may also choose to pursue arbitration, as the only recourse left to them.
It is the most likely that the arbitration's outcome would cause embarrassment to India. It is arguable that India cannot impose retrospective tax for investments. While the tax and arbitration proceedings may take a while to resolve, it is India that is taking a beating in all situations.
The Vodafone controversy first erupted in March 2007 and the Indian government realised that here is a tax loophole that is being exploited by foreign investors. It dragged its feet for five years before bringing an amendment to the law and that too with retrospective effect. If the government was serious in taxing such transactions, the wait of five years deprived India of tax revenues from such transactions for little reason.
The continued inability to efficiently collect tax from such transactions and hackles that are getting raised on this issue time and again, demonstrates that India is neither able to collect taxes from such transactions but also creating a poor investment sentiments that in the past denied Foreign Direct Investments (FDI) in India to its potential and would continue to do so even in the future. Even now it is not too late to amend the law and remove retrospectivity in the law to avoid further embarrassment.
Milind Kothari
Managing Partner & Head - Direct Tax, BDO India LLP
Managing Partner & Head - Direct Tax, BDO India LLP
Also Read
Corporates need tax certainty to focus on their business.
On transfer pricing (TP), a sore point for multinationals, the options are limited - pursue lengthy litigation battles, devise counter strategy, surrender to the aggressive tax authorities or negotiate certainty through Advance Pricing Agreement (APA) introduced in 2012.
This is a subject involving complex facts. It requires the application of varied economic principles. This may often result in subjective opinions.
The much-debated TP-vexed issue of Advertising, Marketing and Promotion (AMP), doing the rounds of high courts and the Income Tax Appellate Tribunal (ITAT) now is the prime example of this uncertainty.
Many perceive the outcome to be the litigation circle getting bigger with no end in sight.
The Delhi High Court ruled distribution and marketing to be closely related and could be analysed as bubbled transactions. So, the compensation for AMP need not be benchmarked separately.
The court emphasised cases need to be dealt with on a fact-specific manner and has now remanded the matter back to the ITAT.
Though the court's principles seem reasonable, interpreting and implementing will require considerable effort and time from both sides.
These are trying times for the government as well.
While it should not let go of what is its rightfully, given the long-drawn litigations, even the government would not be able to achieve certainty on their tax collections.
More importantly, they would also need to avert the risk of getting dragged to court and losing there. The share-premium TP controversy, recently put to rest by the Bombay High Court, is a glaring example where the government finally had to let go of its aggressive stand.
APA seems to be a win-win way forward for both corporates and the government in most of the cases. Now with the APA rollback procedure in place, taxpayers can look at achieving certainty for nine years at once. This includes four prior years and five future years.
Companies need to be proactive and keep ready robust documentation to justify their transfer pricing positions.
Apart from the APA rollback, one could consider the MAP as an effective option to settle existing transfer pricing disputes. MAP is an option provided under Double Taxation Avoidance Agreements that India has with many other countries.
Rohan Phatarphekar
Partner and Head, Global Transfer Pricing Services at KPMG in India
Partner and Head, Global Transfer Pricing Services at KPMG in India