Sean Foley,Global Leader, KPMG, says 'India's Transfer Pricing Rules Aggressive'
May, 14th 2015
Even as the action plan to address Base Erosion and Profit Sharing (BEPS) is being worked out, multinationals are bracing for some turbulent times in India. For some time now, transfer pricing - the price of goods and services determined by a company when two of its subsidiaries transact - has been a huge concern for many multinationals here due to the aggressive stance of the revenue authorities which have taxed many such transactions. Many countries claim that multinationals take advantage of different taxation rates in different countries and don't pay taxes they are required to. BEPS is a mechanism under which the multinationals would have to disclose their profits and taxes they pay in each country. This mechanism is set to bring in some transparency, but it could also lead to a lot of problems, say experts.
In a conversation with ET's Sachin Dave, Sean Foley, global leader, global transfer pricing services, KPMG, said India tops the list of nations for aggressive transfer pricing regimes, and BEPSing regimes, and BEPS could introduce more litigation in the country.Edited excerpts.
How important are India's transfer pricing regulations for global investors and multinational companies, especially when BEPS kicks in a year later?
Transfer pricing rules are prevalent in around 85 countries, but the level to which they are actively audited is different. India and Canada top the list of countries that have most aggressive transfer pricing policies. This (BEPS) is an amazing development not just for transfer pricing, but also for tax in general. The governments have been asking questions whether companies have been paying enough taxes. So, they got together about two-and-a-half years ago and asked the question whether the taxation rules are fit for this digital economy, increased globalisation and increased capital flows. There are tax structures out there where companies following national laws can find that one law doesn't match with another. And there is an opportunity for (tax) arbitrage. This allows companies to pay fewer taxes as a group. So the countries, including India, were saying whether we should take a look at this. The answer is obviously `yes' and the effort was then outsourced to the OECD. We are half way through the project and are hitting the timelines. India has said that it would implement this by April 1, 2016.
Can Indian revenue authorities, based on the data received through BPES, tax the multinationals retrospectively?
This is information sharing, so the one caveat - and India has agreed to this - is that the spreadsheet (of companies' revenue and taxes paid in each country) will not be the basis for (tax) adjustments. This spreadsheet would only be a risk assessment tool.It would be more like, should I fully audit the company based on the spreadsheet. So, this spreadsheet may trigger audits, but how retroactive would this be will be in accordance with domestic law. The information that would be on the table will only be of FY16-17, but once you open an audit there will be questions on whatever is in scope of the audit. So, I would anticipate that it won't have a retroactive effect, but certainly some impact. The Indian government has been criticised for retroactivity in the past. The earlier cases have been where companies and investors had expectations that the rules were `X', but suddenly the government said they were `Y'.
What would be the major changes for MNCs working in India once BEPS kicks in?
The first thing that would change is the information that MNCs would have to provide in the country-to-country reporting. For the very first time, a company will have to explain what its global transfer pricing approach is. So, if a company has a transaction between India and Kenya, it will have to explain that transaction. Now, as you sit down as an auditor in India, you would also get information about, say R&D in Canada, financing centre in Belgium and the manufacturing centre in Indonesia. All of that is going to be in the master file document. And this will tell you how the transaction between India and Kenya fits into the big picture. So, now revenue authorities would have a context and the companies need to think about this very carefully.Also, the companies would have that administrative burden on themselves and there is a risk that whenever you put more information in front of the governments, you trigger more audit activity and assessments. Ultimately in transfer pricing, we talk about this double tax, and BEPS is about double non-tax. As we move the risk, we are clearly going to have a risk of double tax where same income is treated differently.