The Organisation for Economic Co-operation and Development (OECD) which has recently released its first set of recommendations under its 'Base Erosion and Profit Shifting Project' (BEPS), has dealt with seven elements of its action plan, including transfer pricing issues.
These recommendations will help countries to ensure coherence of corporation income tax at the international level through new model tax and treaty provisions; realign taxation and relevant substance which will help prevent tax treaty abuse and deal with various transfer pricing issues, especially in the area of intangibles. In addition, OECD has also called for improved transfer pricing documentation and a template for country by country reporting. Emphasis has been laid on developing a multilateral instrument to amend bilateral tax treaties.
BEPS is aimed at designing a single set of international tax rules to end the erosion of tax bases and the artificial shifting of profits to jurisdictions to avoid paying tax.
India is involved in the BEPS project and Indian officials are also part of the working committee groups on various issues, such as tax conventions, tax policy analysis, transfer pricing, exchange of information & tax compliance and lastly aggressive tax planning. Thus, the first set of recommendations were keenly awaited. Presenting the OECD's recommendations, on September 16, Secretary-General Angel Gurria said: "The G20 has identified base erosion and profit shifting as a serious risk to tax revenues, sovereignty and fair tax systems worldwide. Our recommendations constitute the building blocks for an internationally agreed and co-ordinated response to corporate tax planning strategies that exploit the gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment."
The OECD recommendations will be a key item on the agenda when G20 finance ministers next convene at a meeting hosted by Australia's Finance Minister Joe Hockey on 20-21 September in Cairns, Australia. The proposed measures were agreed after a transparent and intensive consultation process between OECD, G20 and developing countries (including India) and stakeholders from business, labour, academia and civil society organisations.
"Addressing BEPS is a key priority of governments around the globe. OECD's BEPS initiative brings together 44 major economies of the world on an equal footing. Developing countries and other non-OECD countries have been extensively consulted. The recently delivered first set of reports aims to provide a comprehensive and coherent solution to BEPS and reflects a broad consensus. From an Indian perspective, measures to deal with treaty shopping and other forms of treaty abuse, transfer pricing rules in the key area of intangibles which aims to ensure that profits are taxed where economic activities generating the profits are performed and where value is created, and country-by-country reporting which will provide information on the global allocation of profits, economic activity and taxes of multi-national enterprises are of great importance, Equally important is the agreement to implement BEPS measures through a multilateral instrument," says Rajendra Nayak, tax partner at EY.
Transfer pricing is a sore point for companies doing business with India. Here, the OECD has made significant recommendations. "In the context of intangibles, progress seems to be made on addressing the concern pertaining to the importance of segregating the location (jurisdiction) where returns on intangibles have been accrued vis-a-vis where economic activities take place and value is created. This would mean that legal ownership and contractual arrangements could be the starting point for analysis but parties contributing to development, enhancement, maintenance, protection and exploitation of the intangible must be appropriately remunerated. From an India perspective, the revenue authorities during transfer pricing audits, have been focusing on many of these aspects. In fact, there are two circulars already issued by the Indian Revenue pertaining to Contract R&D which focus on the conduct of the parties and the substance of the transaction," points out KPMG in its communique.
"The BEPS release on intangibles and transfer pricing documentation will have far reaching implications in the transfer pricing landscape in India and around the globe. With this increased clarity, companies having international operations will have to work towards not only adhering to compliance obligations but also review the operating structures in various jurisdictions as countries are expected to incorporate the action points in its local regulations," says Rohan K Phatarphekar, Partner and National Leader, Global Transfer Pricing Services at KPMG.
As regards, transfer pricing documentation, OECD has called for a three-tie structure - maintenance of a Master File, a Local File and a Country-by-Country Report. "As a part of G20 countries, India too has agreed to the 3-tier TP documentation structure, however some emerging markets like Argentina, Brazil, China, and India have expressed a view that they will require additional transactional data regarding payment of interest, royalty and especially service fees also to be reported as a part of Country-by-Country report to ensure that they have information regarding global operations of MNCs headquartered outside India, which has been a challenge for them so far," points out the KPMG note.