Audits to be less random but more efficient, result-oriented
Soon, tax authorities in India and elsewhere will pick up cross-border transactions by multinational corporation for audit much less randomly than now in what would appear to be a non-intrusive approach to these firms even as the taxman’s revenue utility of such audits would only increase. A senior finance ministry official said on Friday that the country will adopt a set of new transfer pricing (TP) documentation rules compliant with a framework being evolved at the OECD’s behest by 2015-end. The new rules, he said, would make scrutiny of MNC transactions to ascertain if companies understate income and slash tax bills here more efficient and result-oriented.
MNCs have complained of the haphazard and aggressive way TP audit cases have been selected by Indian tax authorities. Until recently, when India shifted from compulsory audit of every cross-border transaction above R15 crore to a more selective approach of risk-based auditing, transfer pricing adjustments or alleged income under-reporting by multinationals in India had seen huge increases year after year. TP adjustments had since come down to R59,000 crore in FY14 from a high of R70,000 crore in FY13.
This declining trend could be buttressed with the OECD initiative. Most of the developed and many developing nations are also joining OECD initiative.
Under the proposed arrangement, India’s income tax department will get access to sensitive operational details of every MNC present in India some way or the other in other tax jurisdictions. In the same way, the foreign tax authorities adopting the OECD framework will get access to all details regarding the Indian operations of MNCs incorporated/present on their soil.
The move is aimed at preventing the corporate practice of shifting profits from the major economies they operate in to countries that have lower tax rates.
Under the framework meant to check what is called ‘tax base erosion and profit shifting’, the most revolutionary requirement is a comprehensive country-by-country reporting of all relevant business details of a multinational conglomerate to the tax authorities in every country it is present.
The details to be reported include the number of employees in every subsidiary, the economic value addition in every country, the profits reported, where intellectual property rights are held, the related parties in every country and how business is organised globally. The new reporting requirement would give every tax authority a bird’s eye view of whether the economic activity correspond to the profits reported there.
Thus, the I-T department will have access to all the operational details of, say, the Tata-owned British company Jaguar Land Rover, while the UK tax authority, the HMRC, will have access to the business details of Sterlite Industries, owned by the London-listed Vedanta Resources.
“India is involved in every stage and at every level of decision making in this OECD project, which will be ready for implementation once OECD adopts its final report by 2015 end or early 2016. We are simultaneously working on the transfer pricing documentation rules that we need to have in place once OECD adopts the final report,” said Akhilesh Ranjan, joint secretary in the finance ministry handling foreign tax.
“It (the new rules) is not something that will come after three or four years, it is something that is coming right now,” said Ranjan, addressing a tax conference organised by industry body CII.
This extra information will only be used as a tool for assessing the risk of tax revenue loss and selection of possible cross-border transactions for rigorous transfer pricing audits. Officials explained that India has done away with the system of compulsory audit of all cross-border transactions above Rs 15 crore from this year and has adopted risk based auditing. “This would help taxpayers also as only transactions with the highest potential for revenue leakage will be chosen for audit,” explained the official.
India will also sign a multilateral legal instrument with G20 and OECD nations on information sharing in the light of the new transfer pricing documentation rules that would complement existing bilateral treaties.
Checks and Balances
* India part of global move to check tax avoidance
* To frame new norms of reporting of global operations of MNCs
* Country by country reporting rules to be ready by 2015-end
* Tax authorities to audit cross-border transactions by new OECD principles
* MNC transactions to be scrutinised to see if firms understate income, tax bill
* MNCs complained of the aggressive, haphazard audits till recently
* Tax demands from cross-border deals witness declining trend