Transfer pricing litigation issues need to be addressed
February, 27th 2015
Certainty and reduced litigation on transfer pricing (TP) issues will be the cornerstone of creating a non-adversarial tax regime in India. The authors believe that Budget 2015 ought to lay out a roadmap to achieve this goal for TP issues – Recent positive progress on the Advance Pricing Agreement (APA) programme, advances in competent authority negotiations between India and US, legislative changes introduced (but yet unimplemented) in Budget 2014 and the Government’s non-adversarial stand on the issue of share valuations lay out hope that Budget 2015 will meet this expectation.
Building a world class APA programme Introduction of rollbacks last year (details still awaited though) and the likely opening of the India-US Bilateral APA window in 2015 will provide a further impetus to the programme and needs to be supported by:
- A structured channel for taxpayers and their representatives to provide feedback to the APA team and the Central Board of Direct Taxes (CBDT) on making the process more effective and sharing knowledge and global best practices on TP issues - Local & international training of the APA officers not only from a customer service mindset perspective but also on the latest thinking in emerging TP areas - Draft position papers on standard industry issues for public consultation and standard internal positions which can act as guidance for the APA team and create the ‘right’ expectation from the APA programme - Changing India’s position on not allowing bilateral APAs with countries where Article 9(2) of the tax treaty is absent (e.g. Singapore, Germany, France)
Special measures for captive Information technology (‘IT’)/ IT Enabled Services (‘ITeS’) players
Recent APA experience shows that the CBDT is willing to consider markup rates for captive IT/ITES service providers lower than those provided under the safe harbour regime and have also given the APA team sufficient experience to develop a comprehensive approach to close APAs for captive IT/ITES players. With this experience, the Government must develop a well-defined framework to give certainty on markups to such taxpayers – this framework could either shape up in form of a fast- track light-touch APA programme or could be implemented by making appropriate amendments to the existing safe harbour regime (which has not seen many takers so far due to high rates and overlapping definitions on type of taxpayers).
An unconventional idea the Government should also consider in this area is to see whether such a framework can be used to resolve pending litigations at Dispute Resolution Panels and Tribunals for even those years which fall outside the rollback period.
The advantages are obvious – immediate reduction in ongoing litigation on repetitive & fairly straightforward issues apart from freeing up significant time of the CBDT allowing them to focus on reviewing high risk tax payers.
The authors believe that this could have a transformative impact on the Government’s intent to build a non-adversarial tax regime and send the right signals to the investor community at large.
Announcing a vision to implement the Tax Administration Reforms Committee’s (TARC) recommendations:
In the context of TP, the TARC observed that India has far more TP disputes as compared to other countries and given the present workload, potential riskier cases could have missed the authorities' attention. The TARC recommended that the CBDT could issue guidance and positions on standard TP issues to help ease the uncertainty and litigation for taxpayers in addition to developing guidelines for comparability adjustments, to ensure consistency. The TARC proposed that the CBDT could collaborate with the ICAI to bring better disclosure and accounting norms, harmonious to tax laws. Other progressive and pragmatic suggestions include having trained economists on the APA Panel since the process is future oriented, rationalising the current lop-sided workload across TP officers, transition from a single year audit to multiple-year audit and relaxing penal consequences for bonafide disclosures.
The authors believe that the Government should articulate a long term vision and implementation plan to make the TARC wishes a reality few years down the line.
Other legislative & administrative measures: Attention to the following small measures will also go a long way in improving the ease of doing business in India: - Increasing the current limits for maintaining TP documentation of INR 10 million (which have remained static for the last 12 years) to INR 100 million - Excluding Director’s remuneration and transactions between domestic entities not eligible to tax holidays from the purview of domestic TP norms – the nature of these transactions do not align with the underlying intent of using TP provisions to check tax abuse and excluding them will reduce tax payer’s documentation burden.