Remove transfer pricing complexity, promote FDI

Updated: Jan 31 2002, 05:30am hrs
As the world is evolving towards becoming one global village, transfer pricing has become the most contentious area of international taxation. Changes in manufacturing processes, increased data communication and networking, and the increasing role of services and valuable intangibles in the economy as well as the creation of trading zones enable businesses to operate more effectively transnationally. As a result, related party trade is growing both in volume and in scope. The implications of intra-company transfer pricing policies for government revenues can be significant, as such prices affect customs, excise and sales taxes as well as income taxes paid in relevant countries.

A survey by Ernst & Young on transfer pricing practices of multinational companies suggests that an overwhelming majority is exposed to the risk of being taxed twice on the same profits. Hence, there is need for an appropriate and considered transfer pricing strategy which balances opportunity and risk management, weighing effective tax-rate optimisations against fiscal authority challenges and the cost of compliance.

Although detailed transfer pricing documentation requirements and penalty regulations were introduced in India in April 2001, further simplification and adjustments are required. At present, a 5 per cent range is allowed for the derived arms length price. Transfer pricing is not an exact science and hence it is difficult to point out the correct arms length price. We recommend that the range should be increased to, at least, 15 per cent.

The most important aspect is valuation of intangibles which complicates compliance on transfer pricing. We recommend that specific guidelines in respect of the nature of valuation be notified specifically. Also, the penalty structure needs to be toned down and should be levied only in exceptional cases. Transfer pricing adjustments may result from genuine business decisions and should not be seen as concealment of income.

In wake of the recent happenings, defence and security are other important areas that the chamber considers should get due prominence in the Budget announcement. There are immense opportunities for co-operation on trade and businesses between India and America to introduce state-of-the-art technology in this sector.

The chamber also seeks strong government support for research in both information technology (IT) and non-IT-related activities. The pool of talent makes India a haven for IT and other research-oriented outsourcing. We recommend a tax incentive scheme to unlock the hidden GDP potential in this area. By supporting investments in research institutions that promise to deliver value via new generation innovations and inventions to the masses, whether in IT or communications or telecommunications, media, biotechnology etc, we can enable advancing technology for the masses.

We propose that international and local institutions be provided with a 150 per cent tax credit on investments directly related to research and development. The chamber would be happy to render its full support to the government to take this forward. This will help promote FDI in research establishments and projects in India, which in turn is expected to deliver additional employment, GDP growth and ultimately uplift the quality of life of the masses.

(The writer is Regional President, Indo-American Chamber of Commerce, North India Council)