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 Multinationals face quandary over transfer pricing

New accounting standards may trigger transfer pricing adjustments for multinationals: Experts
July, 26th 2016

Even as Indian companies prepare for the new accounting standards -- Ind-AS -- multinationals are concerned that the new standards could trigger transfer pricing demands from Indian tax authorities.

Some multinationals will conduct impact analysis of the new accounting standards on transfer pricing, while some, that have faced large transfer pricing tax demands, will try to assess if there could be any problem arising out of transfer pricing, given the new accounting standards.

The worry is that income tax officers would compare accounts of previous years against the current year. But old account was prepared by rules of earlier accounting standards that may cause some figures to vary. Under Ind-AS, every matric, including revenue recognition, depreciation, interest, divined and profit margins would change, said industry trackers.

"An interesting impact of the phased Ind-AS implementation will be tested in the coming years when the industry comparable company gross and net margins of multinationals will be derived from diverse year-on-year financial statements - some adhering or not adhering to Ind-AS," said Atul Deshmukh, Partner, KNAV US, a tax consultancy.

Transfer pricing is mainly a price or cost at which a subsidiary of a company buys or sells goods or services from its parent. The rationale is that a subsidiary is a separate entity from its parent. And they should buy and sell goods at market price. If such transactions are not carried out at market price, then it is concluded by the revenue officials that this is an attempt to escape tax in India.

Revenue officials use many methods to arrive at how much tax is evaded, but mainly they compare each and every aspect of a transaction to the industry average. The issue now is, the industry average will go topsy-turvy due to the new accounting standards. Indian companies are required to shift from current standards -- Indian GAAP -- to the new accounting standards Ind-AS from the current financial year.

"Transfer pricing is generally with reference to the cost base and due to Ind AS adoption, the cost of companies would change around grossing up of excise duty, stock option, higher depreciation, interest cost and other such notional costs and thereby impacting the cost plus margin and related profits of some companies. This is likely to impact the current tax as well," said Sandip Khetan, Partner at SR Batliboi, a member firm of EY Global.

The revenue officials tend to take three-year averages to decide whether multinationals are evading any tax and if they are required to pay any tax in India. The worry now is, while past two years' results are calculated with a different method, this may throw some unexpected results.

"There is a significant worry that transfer pricing adjustments are going to increase as while last two year's financial data is per erstwhile Indian GAAP, the current year's accounts may look very different," said Deshmukh.

Industry trackers said that there are many worries that surround companies due to the new accounting standards. Some MNCs have woken up to the transfer pricing issues and are looking to preempt such issues in advance, while others are still focused on other tax related issues.

One of the biggest worries apart from transfer pricing is that companies' current tax liabilities may go up as they could start attracting minimum alternate tax at around 20%. "For many companies, MAT remains a bigger issue, but depending on what position is taken by the company to tackle this, there may be some implications on transfer pricing next year," said Khetan.

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