Published on March 12, 2014
Developments in Transfer Pricing TransPrice Knowledge Alliance Akshay Kenkre Managing Partner
Outline 1. Our Journey till date 2. Introduction to ‘TransPrice Knowledge Alliance’ 3. Agenda for FY 2014-15 4. TP Overview including documentation 5. Recent developments 6. Summary of key assessment issues – Topic for future discussions 7. Synthesis Group 8. Conclusion and vote of thanks 2
3 Journey till date
Our Journey 4 Established on 03-03-13 Objective: To value add to the industry with specialist knowledge Conducted first annual event ‘INDIA Transfer Pricing Summit – 2013’ Stress on subject matter expertise and extensive research Research paper on ‘Intangibles – with emphasis on marketing intangibles’ ‘TransPrice Weekly’ : An Initiative to keep industry updated Trained PAN India CAG team 100% success results at representations
5 TransPrice Knowledge Alliance
TransPrice Knowledge Alliance 6 Vision : 1. Build an advocacy group in Transfer Pricing, to represent the industry at large, at appropriate forums 2. Spread awareness and share knowledge on Transfer Pricing 3. Update industry on real time basis 4. Experience sharing from the assessment and litigation 5. Arrive at and suggest plausible solutions for Transfer Pricing issues 6. Offer Networking platform for the benefit of members TransPrice’s client automatically becomes member of the forum and special invitees to INDIA Transfer Pricing Summit- 2014, to be held on 8th August
7 Agenda – FY 2014-15
Agenda- FY 2014-15 8 • Frequency of Meeting : Tri-annual ( July 14, November 14, March 15) • Topics of discussion to be considered in the year: • Technical issues like search process, comparability, aggregation of transactions, operating/ non operating income and expenses, Economic adjustments • Practical and industry issues like customs- TP convergence, Location savings, intangibles, royalties, guarantee commissions, interest rates, marketing support, cost sharing, share valuation • Business specific like Pharmaceutical, R&D, Iron and Steel, Chemicals, Media and entertainment, Heavy machinery, Automobiles, Jewelry and Gems • Amendments, New legislations , case laws
Today’s Agenda 9 • General Transfer Pricing overview • Understanding Transfer Pricing documentation • Discussion on latest developments in Transfer Pricing • Topics of discussion for future meetings and fixing on the dates
10 TP Overview
Transfer Pricing - A Snapshot 11 Worldwide is one of the most complex and challenging tax domain Anti – Avoidance law Leads to Double Taxation Impacts every element of supply chain India accounts for approx 70% of world TP litigation One of the countries having strong view on TP regulations Direct impact on the companies Effective Tax Rate (ETR) Penalty implications
Trends in TP Assesments in India 12 0 10000 20000 30000 40000 50000 60000 70000 80000 Adjustment (Rs Crores) Years of Transfer Pricing Assessment High adjustments on account of issues like corporate guarantees, marketing intangibles, share transfer 239 337 471 84 670 813 1138 1343 3200 Number of cases
Objective 13 Maximization MNE Maximize profit subject to Arms length principle Maximize overall profits as compared to how an independent parties would operate Maximize group profits by diversifying functions around locations Revenue Authority Profit maximization by using lowest / highest possible ALP Balancing of taxes and investment/ growth in a country Direct and short term vs. Long term benefits and growth TP is anti avoidance law and not basis of charge • Appropriate Documentation • Effective and risk evaluated structuring and diversification • Effective tax supply chain management ` Profit Revenue
Fixing TP vs. Testing TP 14 TP Process Fixing Transfer Prices Testing Transfer Prices Includes: • Planning Stage • Understanding the FAR and characterizing the entity • Setting up of TP policy and agreements (MM or CP) • Active negotiations with AE for price setting • Setting Transfer Prices • Documenting is the key Includes: • Post year end activity • Confirming and auditing FAR, policies, agreements • Compliance as per Tax laws • Benchmarking/ Economic analysis • Testing methods can be different than fixing methods • Maintenance of TP Study before due dates
Documentation – Fixing stage 15 • Transfer Pricing Policies including price setting mechanism • Intercompany agreements • Negotiation mails and discussions • If a budgeting method is followed, then such procedure • Contemporaneous documentation • Documentation in Rule 10D format if international transactions exceeds Rs 1 crore • Limit of Rs 15 crore – only for reference to the TPO, below 15 crores- AO bound to do transfer pricing assessment • The limit is set only through an internal circular and it is not a rule • Selection and reference to TPO is purely on risk basis and not amount of international transaction
Documentation – Testing stage 16 Transfer Pricing is all about comparability and documentation Transfer Pricing Documentation, including: Identification of international transaction and Industry Analysis Functional , Risk and Assets Analysis Economic Characterization Economic Analysis ( Selection of MAM – Comparability – Arms Length) Conclusion on ALP Preparation of preliminary benchmark studies Transfer Pricing Accountant’s report – Form 3CEB Transfer Pricing report drafting and generating back up documentation Due date for maintenance and filing for 31 March 14 is 30 November 2014
Compliance and Documentation 17 1 Apr 13 31 Mar 14 30 Nov 14 30 Sep 15 31 Jan 18 31 Mar 24 Beginning of Tax year Close of Tax year Due date of maintaining TP documents and Accountant’s report Limitation of initial assessment Limitation of completing TP assessment Requirement until which FY 2013-14 documents required to be maintained Timeliness
18 Recent developments
Definition of International Transaction 19 Retrospective and clarificatory amendment (w.r.e.f 2002) to include transactions : • Purchase , sale , transfer, lease use of tangible property • Purchase, sale, transfer, lease, use of intangible property • Financing including loan, guarantee, securities, debts, advance payments etc • Any type of provision of service including market development, service, administration etc • Structuring , restructuring, reorganization (covers issue of shares), irrespective of the fact that the same has bearing on profits or not Further the definition of intangible property has been elaborated to include all and any types of rights having a commercial backing
Specified Domestic Transactions 20 Genesis to the Glaxo case Allowance for expenditure or allocation of cost or expense or any income related to SDT to be computed with regard to arm’s length price (‘ALP’) Applicable from Financial Year (‘FY’) 2012–13 onward SDT defined as any of the following transaction (s) that are not international Transactions: Payments to related parties as defined under section 40A (2) (b) of the Income Tax Act, 1961 (‘Act’) Tax holiday-related transactions (eligible business- 10AA, 80IA, 80IB, 80IC, 80IE, 80ID) – Both Income as well as expenditure needs to be tested Tax payers to maintain appropriate TP documentation Monetary threshold of INR 5 Crores in aggregate
APA introduction- Historic Scenario 21 Aggressive Positions adopted by Transfer Pricing Office Ignored FAR, business, industry and economic realities Adoption of standard industry wise position: IT/ ITES industry : 25%- 35% cost plus mark up Contract R&D : 30% cost plus mark up Clinical Trials: 30% cost plus mark up Marketing Intangibles: cost plus/ profit split method Loan Transactions: use of Indian loan rates Corporate Guarantees: adhoc rate without credit analysis
APA introduction-Litigation Roadmap 22 Litigation Options DRP/ CIT (A) ITAT High Court Supreme Court APA Defensive Progressive Transfer Pricing is the biggest challenges faced by MNCs in India
Finance Act, 2012 – APA Introduced 23 2010 • APA introduced in proposed DTC, 2010 • The implementation of DTC itself failed Feb 2012 • Much awaited APA was then introduced in the Finance Act, 2012 • Basic Framework provided in the Finance Act, 2012 Aug 2012 • Detailed APA Rules introduced
APA Regulations 24 Insertion of Rule 10F to 10T and Rule 44GA Applicability : All persons, undertaking or planning to undertake international transaction Types of APAs APA Unilateral APA Bilateral APA Multilateral APA Solely between taxpayer and tax authority Mutual agreement between CA of two tax administrations More than one Bilateral agreement
APA procedure 25 Application of APA: Entered by CBDT with taxpayer, after approval of CG Taxpayer APA Team ( APA Directors & Officers) DG International Taxation Competent Authority Board Approval Competent Authority Associated Enterprise (AE) Experts from Economics, sta tistics, law etc. INDIA Outside INDIA
APA Process 26 Phase 1 Decide to enter the APA (feasibility analysis) Phase 2 Prefilling consultation with the Tax Authorities Phase 3 APA Application Phase 4 Negotiation Stage Phase 5 Finalization of APA Phase 6 Furnishing of Annual Compliance Report Timing of application: APA for transactions in FY 2014-15 : Application to be made before 1 April 2014 Incase of other transactions ( new or proposed transactions) , any time before undertaking the transactions
Tolerance Band 27 FA 2012 provided that benefit of the tolerance band will not be available if the difference between ALP and International Transaction is greater than +/-5% April 2013, the tolerance band was revised to +/-3% of transactions price and +/-1% of transaction price in case of wholesale trader
Other Amendments 28 TPO can question and audit any transaction that is not reported by the taxpayer Industry visits by the TPO permitted to check operations and contemporaneous documentation Penalty @ 4% of international transactions ( earlier was 2%) Penalties applicable for SDT transactions Applicability of 6th Transfer Pricing Method Rule 10AB – Any other method : includes transactions of unique nature for which application of other 5 method is difficult. Valuations, guarantee methods etc. E- Filing of Form 3CEB
29 Key assessment issues
Key issues – Topics for future discussions 30 Marketing Intangibles ( advertising, marketing and promotional expenditure) What are marketing intangibles Guidance around the same LG case Research and Development services Importance of allocation of FAR Importance of function vis-à-vis risks Identification of risk bearing entities Transfer of intangibles Circular 5 & 6 issues by CBDT
Key issues – Topics for future discussions 31 Management cross-charge Concept of intra group services and management fees Importance of policies and agreements Documentation to justify benefits rendered and cost allocated Financial Transactions Provision and receipt of loans Provision and receipt of corporate guarantee Issue of share capital and transfer of shares Location savings
Key issues – Topics for future discussions 32 Other Issues: Data availability Internal and external comparable Loss making scenario Use of custom data Secret comparables Economic adjustments like working capital, risks, depreciation, capacity Cost allocations Penalties Sourcing support and indenting Benchmarking royalties
33 Our Group
Our Group (1 of 2) 34 Intellivate Capital, provides an entire spectrum of services in Investment Banking, Project Management, Fund Raising and Management Aurum Capital handholds the SME sector with structured and unstructured debt to finance their operational activities through cash credit, working capital and term loans Manish Modi & Associates is a Chartered Accountancy firm providing services in areas of Audit and Assurance, Compliance, Regulatory and Consultancy including finance and tax consultancy
Our Group (2 of 2) 35 TransPrice Solutions is a specialist organization, with core focus on Transfer Pricing. It provides expert advisory, representation and compliance solutions in Transfer Pricing arena Brianna Knowledge Resources is a corporate training platform in the field of finance. It is a creation of industry professionals who bring in a synergy of knowledge bases and real time experiential learnings to the training platform Pinnacle Education is a educational training institute molding thousands of aspirants up to Final CA
36 Contact Us
37 CA. Akshay Kenkre Managing Partner TransPrice Solutions LLP Address: Gita Building, 2nd floor, Plot no. 92, Next to HP Petrol Pump, Sion (East), Mumbai - 400022 Tel : 022 - 2409 3737/ 409 7171 Mobile : + 91 9819245424 Email : email@example.com firstname.lastname@example.org
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