Indian transfer pricing (TP) regulations have been in place since FY02, with changes being effected over the years to bring them broadly in line with global norms. With Budget FY17 round the corner, the anticipated changes include TP documentation (TPD), intangibles and substance.
Improved TPD increases the quality of information provided to tax administration and should limit taxpayers’ compliance burden. BEPS Action 13 (AP13) has suggested a three-tiered standardised approach to TPD, including a minimum standard on Country-by-Country Reporting (CbCR).
The CbCR template suggests maintenance of information regarding each country that the MNE operates in and includes information such as revenue, profits, taxes and other economic indicators. AP13 suggests maintenance of information regarding global business operations and TP policies in a global Master File and maintenance of detailed transactional TPD be provided in a Local File specific to each country.
The TP regulations on documentation enshrined in Rule 10D are aligned to meet Local File requirements. But for CbCR and Master File, changes in TPD requirements are expected.
* Contents recommended in AP13 are comprehensive and changes to Indian TPD requirements could be in line. More requirements would put unwarranted burden on taxpayers.
* Threshold of annual consolidated revenues of 750 million euros (R5,500 crore) for CbCR applicability is a good threshold and could be maintained.
* Timeline for filing CbCR should be at least one year. Unless there are major material changes, the requirement to update Master File and Local File should be no earlier than three years.
* CbCR is only a TP risk assessment tool, so a revised risk assessment framework should be put in place.
* Ample safeguards for maintenance of confidentiality of CbCR data.
Increased TPD requirements and a focus on transparency and PoEM-related changes will put onus on Indian headquartered companies to be sufficiently prepared, including in terms of their IT systems. Indian entities of global MNEs should be aware of the nuances of the CbCR and the potential need for its local filing.
There has been rising focus across stakeholders around the need for substance. The focus from a TP perspective emanates from intangibles and control over risks, both of which embody substance-related measures.
For reducing the level of subjectivity, definition of ‘intangibles’ should be amended. A one-line definition as per BEPS Action 8 “which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances” can be considered. Listing of intangibles in Section 92B could be indicated as illustrations of intangibles if they fall within the aforementioned definition of intangibles.
Guidance to bring about objectivity in identifying substance of arrangements is expected. Since India has endorsed BEPS deliverables, guidance can be issued to the effect that, on matters where Indian regulations are silent, guidance provided in BEPS Actions 8 & 10 can be adopted.
How the Budget codifies the changes (rule-making or legislative) is expected with a bated breath. The last thing that India needs is more TP tax disputes. We need changes in our stance to allow resolution of TP disputes through APAs/MAPs even in absence of Article 9(2) in tax treaties; and acceptability of alternative mechanisms like domestic and international tax arbitration.
If successful, MNEs would be able to objectively align international affairs and dispel uncertainties around more tax disputes/controversies.
Will this Budget be an enabler for ‘Make in India’, ‘Make for India’ and, most importantly, ‘Make India’ is something which will soon be answered.
Mehta is partner, Pai is manager, Price Waterhouse & Co LLP