Finance minister Mr. Arun Jaitley presented the 2016 Union budget on February 29. This article summarizes some of the key amendments made under the Union budget impacting the transfer pricing (TP) provisions in India.
Following the release of OECD's Base Erosion and Profit Shifting (BEPS) report on Action Plan 13 (Transfer pricing documentation and country-by-country (CbC) reporting), the Indian TP legislation has been amended to include specific requirements in respect of CbC reporting and master file documentation with effect from financial year 2016-17. CbC provisions introduced in the Finance Bill, 2016 are broadly in line with the recommendations of OECD BEPS Action 13 report.
Some of the key provisions in relation to CbC are as follows:
CBC provision shall apply in respect of an international group having consolidated revenue above the prescribed threshold limit (â‚¬ 750 million equivalent in local currency, which is Rs 5,395 crore i.e. the provisions for CbC reporting shall apply for financial year 2016-17 only if the consolidated revenue of the international group in previous year i.e. 2015-16 exceeded Rs 5,395 crore).
If the parent entity for the international group is resident in India, it shall be required to furnish the report in respect of the group on or before the due date of furnishing of return of income for the previous year for which the report is being furnished.
An entity in India belonging to an international group shall be required to furnish CbC report to the prescribed authority in India if the parent entity of the group is resident in a country with which India does not have an arrangement for exchange of the CbC report; or where the country of the parent entity is not exchanging information with India even though there is an agreement.
The report would contain aggregate information in respect of revenue, profit & loss before Income-tax, amount of Income-tax paid and accrued, details of capital, accumulated earnings, number of employees, tangible assets other than cash or cash equivalent in respect of each country or territory along with details of each constituent's residential status, nature and detail of main business activity and any other information as may be prescribed. This shall be based on the template provided in the OECD BEPS report on Action Plan 13.
For non-furnishing of the report by an entity which is obligated to furnish it, a graded penalty would apply which would range from Rs 5,000 to Rs 50,000 per day of default.
As regards maintenance of master file documentation, Government shall notify rules which shall prescribe the information and documents as mandated for master file under OECD BEPS Action 13 report. Non-furnishing of master file may lead to a levy of penalty of Rs 5 lakh.
Currently, under Section 271(1)(c) of the Act, where any TP adjustment is made by the tax officer then such adjustment amount was deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished. Consequently, the tax officers invariably in all cases proceeded to levy penalty (at a rate of 100-300 per cent of tax sought to be evaded) where TP adjustment were made by the TP officers. With effect from 01st April 2016, Section 271 will be replaced by Section 270A which provides for penalty in cases for "under-reporting" and "misreporting of income".
Where the taxpayer had maintained the prescribed TP documentation declared the international transaction under Chapter X and disclosed all the material facts relating to the transaction, it shall be presumed that the taxpayer has not "under-reported" income. Therefore, no penalty should be levied where the TP adjustment only emanated from difference of opinion on the arm's length price of transactions determined by the tax officer vis a vis arm's length price as determined by the taxpayer.
However, where taxpayer fails to report any international transaction or deemed international transaction under Chapter X, the taxpayer shall be liable for penalty at the rate of two hundred per cent of the tax payable on such misreported income. It is important to note that failure to report an international transaction or specified domestic transaction also leads to a penalty of 2 per cent of value of such transaction under Section 271AA of the Act.
Thus, it seems that Government has laid a lot of emphasis on true and correct disclosure of international transactions by taxpayers, failure of which may lead to stringent penal consequences both under Section 270A and 271AA.
Post June 2016, the time limit of the completion of the assessment proceedings (where reference has been made to TPOs) will be reduced from 36 months to 33 months. This implies that the TP assessment proceedings will now become time barred in the month of October of a tax year.
With the due date of compliance of TP study/ CbC/ master file being November 30 of a tax year, the revised time line of completion of TP assessment proceedings will leave taxpayers with limited time to focus on all compliances and assessment proceedings.
Lastly, in line with the intention of the Government to minimise litigation, orders passed by Dispute Resolution Panel (DRP) will not be appealable by tax authorities.