Indian Transfer pricing (TP), since its introduction has attracted a lot of attention for reasons ranging from some specific peculiarities in the Indian TP regulations to the vast scale of TP disputes over the years.
India as an observer of OECD and a member of G20, has been actively participating in the much anticipated BEPS project. To bring India's BEPS efforts into action, one can expect the leap-year budget to introduce changes in TP regulations.
Key areas to be watched out in Budget 2016 are changes relating to TP Documentation, substance based evaluation of Indian operations and possibilities of alternate dispute resolution mechanisms.
Key developments and expectations:
1)Country by Country Reporting (CbCR)
Action 13 of BEPS project provides guidelines on TP documentation involving maintenance of Master file, Local file and CbCR, which includes key information such as revenue, profits, taxes and other key economic indicators.
Current TP regulations in India on documentation enshrined in Rule 10D are more or less aligned to meet the Local File requirement. Hence, it would not be prudent to amend Rule 10D relating to Local File maintenance requirements. However, for implementing Master File maintenance and CbCR, changes in TP documentation norms are expected.
Other key changes on this aspect which are expected include:
Given the significant effort in the development and maintenance of CbCR, due consideration ought to be given by the Government, that the 750 million euros equivalent consolidated turnover threshold should be adopted and make CBCR mandatory for only such Indian MNEs that exceed such threshold.
One may also consider a scenario that where an Indian Co. has filed CbCR for the group, it may be exempted from TP Documentation & Accountant's report related compliances. Key terms finding reference in CbCR should be specifically defined to avoid ambiguity.
BEPS project acknowledges that CBCR must be viewed by tax authorities only as a TP risk assessment tool. Hence, a revised risk assessment framework should be put in place.
If India yearns to maintain its pro-investment outlook, Budget 2016 should seize the opportunity and bring about and commit to ample safeguards for maintenance of confidentiality of CbCR information. With CbCR and POEM related changes, the companies need to organize themselves and be sufficiently prepared, including in terms of their IT systems.
Intangibles and substance
In the recent times, there has been an increased focus to look into substance of cross border intra-group arrangements rather than just be satisfied with the form of these arrangements. From a TP perspective, the focus originates from intangibles and control over risks, both of which symbolize the key substance related measures.
We have seen a substantial debate over several years on intangibles. Hence, an alignment on the definition of "intangibles" in this regard would therefore be important and required, as implementation or adoption of subsequent BEPS guidance on intangibles may otherwise pose a challenge.
Further, the current listing of intangibles in Section 92B, could be indicated as mere illustrations of intangibles, if they fall within the definition of intangibles as stated in Action 8 of BEPS.
In order to bring about objectivity in identifying substance of arrangements, wherever the Indian TP regulations are silent, we need to see how Budget 2016 codifies these action plans, whether through rule making or legislative change, or by merely stating its reliance on the OECD BEPS explanation, which India has been a keen contributor to.
The rationalization of safe harbour rules is a simplistic, yet far-reaching change that should be expected in the Budget 2016. This will enable chronic and low-value TP disputes to be dealt with proactively. The lowering of the safe harbour rates and possibly also expanding their scope, will ensure that the tax authorities do not miss the wood for the trees and are able to deploy resources efficiently and effectively.
In the course of review of cross border transactions, the element of subjectivity is bound to creep in. This inevitably leads to differences of opinion and eventually translate into dispute. In the recent past, Indian Competent Authority and the APA team have shown their keenness to sign as many APAs as possible, thereby, reducing tax disputes and getting assured tax revenues for the Indian Government.
A welcome move in this budget would be to get away with the major impediment to resolution of a MAP and bilateral APA process for TP cases i.e. by allowing resolution of cases even with the absence of Article 9(2) in some of the treaties (such as France, Germany, Singapore, etc.) which India has signed. India could also consider acceptability of other alternative mechanisms such as domestic and international tax arbitration.
With India poised to transform itself, we need to wait and watch how the leap year's budget would seek to rationalise TP regulations and attempts to boost investors' confidence, thereby remaining consistent with the broad economic agenda of the country "Make in India".