Here is what Modi government can do for transfer pricing
February, 12th 2018
Finance Minister Arun Jaitley will present Union Budget on Thursday. Modi government’s union budget is crucial since it is the last one before the 2019 Lok Sabha elections. Budget 2018 expectations are high. From common man to industry players, all are pinning hope on FM Jaitley to deliver. With the Union Finance Budget around the corner, tax is indeed occupying the mindspace of all commentators. Regulating inter-company pricing among group companies has been a dominant theme and there are still a number of areas where companies would benefit from Government intervention.
The Indian APA program has been a stupendous success. The program after 5 years has matured considerably and is capable of finding efficient solutions to knotty problems. With the upcoming Budget 2018, it may be time to extend the program’s mandate to cover domestic transactions also. Large Indian groups with multiple entities have a number of transactions which are undergoing audit by the tax authorities. A new wave of controversy is bound to be created and will end up further burdening the dispute resolution framework. APAs could offer companies an avenue to eliminate uncertainty by agreeing on intra-group pricing upfront.
Finance Act 2017 introduced a limitation on interest deduction for intra-group loans. The concept itself is not uncommon with the US being the latest country to bring in a similar law as part of its tax reform. However, there are valid concerns that necessitate refining the current Indian provision. There is ambiguity on whether this applies to existing debts or only new debts taken on or after 1 April 2017 and needs clarity. Given the general distaste for retrospective applications, it should be clarified that the law only applies to debts on or after 1 April 2017. The interest disallowed in any year can be set off in subsequent assessment years upto 8 years. The 8 year time limit may not be useful if a company is paying tax under the Minimum Alternate Tax provisions. In Union Budget 2018, it may, therefore, need to be considered if an extended time period can be prescribed to ensure corporate taxpayers do not suffer. An unlimited carry forward would be ideal.
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To promote development, companies operating in the infrastructure, real estate sector, or in industries which are capital intensive and face long gestation periods should be excluded in Budget 2018 from this rule as debt financing is commonplace and finding alternative ways of funding may be commercially infeasible. The law is expansive to include loans guaranteed by related parties leading to concerns that implicit guarantees are also covered. Implicit guarantees are difficult to establish and prove and hence, should be excluded from the definition. Appropriate guidance on the kinds of guarantee arrangements sought to be targeted would help mitigate future litigation.
To reduce compliance burdens on taxpayers and optimize efforts and resources of the tax administration, in Budget 2018 it may be opportune to eliminate annual transfer pricing audits and usher in block audits. On domestic transfer pricing, the words “close connection” appearing in Section 80-IA(10) are still ambiguous and should be defined harmoniously with the transfer pricing provisions in Section 92 to reduce interpretational issues and consequent disputes.
Greater information is being requested and will be available with the tax administration through the three tiered transfer pricing documentation structure of a master file, local file and Country-by- Country Report (CbCR). The policy makers could contemplate reducing the compliance burden on foreign companies not having a permanent establishment in India. The law requires them to furnish the transfer pricing Accountant’s Report (under Form 3CEB) for transactions like royalty receipts, service fee receipts or interest income that are subject to withholding tax despite the same transaction being reported in any case by the Indian taxpayer. In Budget 2018, this unnecessarily duplicates efforts and can be dispensed off with.
If the Government’s philosophy is to simplify rules, promote compliance, undertake targeted investigations and bring in predictability, all of the above measures in Budget 2018 will help the cause. A small step in this direction will prove to be a giant leap for the corporate community as a whole.