Remove compliance for non-residents, rationalise safe harbour rules

July 04, 2019 1:42 AM

The government introduced measures to ease compliance burden and make transfer pricing environment non-adversarial.

Transfer pricing, non-residents, safe harbour, safe harbour rules, Base Erosion, Profit Shifting projectThe government introduced measures to ease compliance burden and make transfer pricing environment non-adversarial.

Jitendra Jain

Transfer pricing is one of the most litigious areas in India. This litigation will intensify with the availability of more information with tax administrators in view of the alignment of Indian transfer pricing requirements with OECD/G20 Base Erosion and Profit Shifting project. These requirements provide administrators an opportunity to understand taxpayers’ business and conduct transfer pricing assessment.

The government introduced measures to ease compliance burden and make transfer pricing environment non-adversarial. These include rationalisation of safe harbour rules, risk-based selection of cases for scrutiny and advance pricing agreement roll-back provisions. The upcoming Budget is an opportune time to highlight measures that can further ease the compliance burden and reduce litigation.

Increase threshold for compliance: Taxpayers with international related party transactions exceeding Rs 1 crore are required to maintain detailed transfer pricing documentation. This threshold limit is low and has not been revisited since FY02, when regulations were introduced. Increasing the threshold will contribute towards reducing the compliance burden on small taxpayers. It would not be out of place to highlight that China prescribes a threshold of Rs 40-200 crore, depending on the nature of the transaction.

Remove compliance for non-residents: Transfer pricing provisions require compliance by a non-resident if it derives taxable income from transactions with its related party in India despite the Indian related party undertaking compliance for the same transaction. This leads to duplication of efforts. Non-residents should be excluded from the ambit of transfer pricing compliance in India, provided its Indian related party has undertaken the compliance with respect to same international transactions.

Remove certification requirement: Taxpayers entering into related party transactions are required to prepare a transfer pricing disclosure form and get the same certified by an accountant. This requirement should be done away with. If the idea of obtaining such a certificate is to ensure that the taxpayer doesn’t miss reporting a reportable transaction, the existing penalty of 2% of the value of the undisclosed transaction should act as an adequate deterrent for taxpayers. While several countries have the requirement of filing a detailed disclosure form, only a handful (Argentina, Saudi Arabia, etc) require taxpayers to obtain such a certificate.

Rationalise secondary adjustment provisions: It requires the overseas related party to repatriate the amount of transfer pricing adjustment to the Indian entity and also reflect the adjustment in the book of accounts. If such an amount is not repatriated to India, it is treated as an advance and interest is levied thereon. This is also called constructive loan approach. This creates an issue when the foreign entity faces regulatory hurdles in repatriating the money or where it does not acknowledge the adjustment. In such cases, the interest on the adjustment could be levied till perpetuity.

Many countries that follow the concept of secondary adjustment follow the constructive dividend approach—a one-time event whereby the transfer pricing adjustment is treated as deemed dividend. This is unlike the constructive loan approach, whereby the deemed loan may remain in place for many years or even indefinitely, if not acknowledged by the related party. There is a need for India to shift to the constructive dividend approach.

Rationalisation of safe harbour rules: These were introduced in 2013 and were rationalised in 2017. These rules offered taxpayers an alternative to transfer pricing audits, if they declared profits as specified. While these have been rationalised, there is room for increasing the threshold for eligibility of safe harbour for specified services, which is at Rs 200 crore currently. Further, the margin for specified services should be moderated in line with the margins concluded in the APA proceedings.

Vincent van Gogh said: Great things are not done by impulse, but by a series of small things brought together. Most recommendations made above do not require major changes existing provisions and instead just involve fine-tuning. These changes will go a long way in easing the transfer pricing compliance burden and minimising disputes.

(The author is executive director, Transfer Pricing, PwC India. Views are personal)

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