Related party transactions above Rs 20 cr subject to transfer pricing law'
February, 09th 2016
As India seeks to ride on the growth trajectory, consolidating existing foreign investments and attracting fresh ones is critical. Transfer pricing rules are intimately connected to this given the large volume of inter-company dealings. The union finance budget 2016, therefore, will be keenly watched by all stakeholders.
I expect the honourable Finance Minister to emphasise the growing importance of information and disclosure to aid the tax administration's efforts towards focused scrutiny and more informed risk assessment and decision-making. In this respect, the existing transfer pricing documentation law would be widened to include elements of the Organisation for Economic Cooperation and Development Base Erosion & Profit Shifting (OECD BEPS) project Action 13 recommendations.
The three-layered documentation approach - comprising a master file, a local file and a country-by-country report (CbCR) - is likely to become a legal requirement effective for financial year 2016-17. It is anticipated that the OECD recommendation on CbC reporting requirements being made applicable for multinational companies with annual consolidated group revenues equal to or exceeding 750 million euros (Rs. 5,500 crore approx.) will be retained in the Indian local law also.
To reduce hardship to taxpayers, it is recommended that the requirement to obtain Accountant's report certified by a Chartered Account be removed and instead be replaced with a self-certification by taxpayers.
The Indian transfer pricing law does not at present contain guidance on aspects like intangibles and intra-group services. The extensive work undertaken as part of the OECD BEPS project and the recommendation that inter-company profit allocation should align with value creation will probably be included in local law through suitable changes.
Transfer pricing for specified domestic transactions is seen as imposing an onerous compliance burden on taxpayers. The threshold of Rs. 20 crore for applicability of these provisions is still low. It would, hence, be appropriate to increase this threshold to Rs. 100 crore to ease the burden on small taxpayers. Keeping tax neutral transactions out of the purview of these rules would be welcome and would enhance voluntary compliance.
Payment to directors including remuneration, sitting fees, commission and perquisites covered as a specified payment under 40A(2)(b) read with Section 92BA of the Income Tax Act, 1961 poses a significant challenge in terms of benchmarking at a fair market value in the absence of independent comparable transactions. There are multiple representations requesting for such transactions to be excluded from the specified domestic transactions list.
Different limbs of Section 92BA of the Act use varied terms like 'substantial interest' and 'close connection' leading to differing interpretations to establish relationship between parties. These terms should be defined specifically and harmonised to the 26 per cent threshold defined for international transfer pricing under Section 92A.
Relevant legislative amendments should be brought in to clarify that transfer pricing provisions are not intended to apply to transactions which do not impact income chargeable to tax in India. The government had accepted this proposition in the case of capital transactions like issue of equity shares. An ambiguous aspect in the present law pertains to transactions of business restructuring or reorganisation which qualify as international transactions irrespective of whether they have bearing on the profit, income, losses or assets of the parties at the time of the transaction or at any future date. Lack of guidance on this holds a great propensity of generating avoidable litigation. It is important to address this before that eventuality is reached.
Reducing uncertainty and scope for varied interpretation and potential controversy should be the guiding principles underlying the budget proposals. The stated policy of bringing in clarity and avoiding disputes should continue to be backed by credible action. Simultaneously, taxpayers should be prepared to maintain and disclose more information. However, I imagine this would be a small price to pay in exchange for a predictable and definite transfer pricing regime. The ball is now in the government's court.