thomson reuters general use powerpoint template · – suzuki motor allowed maruti to use its name...
TRANSCRIPT
WELCOME!
“Transfer Pricing Insights from India’s Tribunals” will
begin shortly after the hour.
Audio
The audio should stream directly through your
speakers. If you do not have VoIP capability or would
prefer to use a phone line, make sure your Audio
Mode is set to “Use Telephone” and use the phone
number provided in the “Audio” section on the right.
Questions
If you have any questions please submit them in the
“Questions” box.
CONCEPTUAL: CONNECTIVITY
MARCH 2013
SPEAKER- DR. JAMES HAROLD MCCLURE
SENIOR MANAGER, ONESOURCE TRANSFER PRICING
TRANSFER PRICING INSIGHTS FROM INDIA’S TRIBUNALS
INTRODUCTION
Dr. McClure has over 17 years of transfer pricing and valuation
experience. He began his transfer pricing career at the Internal
Revenue Service in San Jose, California and has experience with
the Big 4 accounting firms. Dr. McClure has assisted multinational
firms with both U.S. and foreign documentation requirements, IRS
audit defense work, and preparing the economic analyzes for
bilateral and unilateral Advanced Pricing Agreements.
Dr. McClure has also assisted clients with both international and
multi-state tax and transfer pricing planning work. These planning
projects have included the valuation of transferred intangible assets,
the determination of arm’s length royalty rates, intercompany loan
rates, intercompany lease rates, and the analysis of a related party
distributor’s gross margin under a market share strategy.
AGENDA
• UN TRANSFER PRICING MANUAL – INDIA
CHAPTER
• PROVISION OF SERVICES BY INDIAN
AFFILIATES AND SUCCESSES BASED ON
TNMM
• LITIGATIONS INVOLVING DISALLOWED
DEDUCTIONS
• INTERCOMPANY LOANS
• Q AND A
UN TRANSFER PRICING MANUAL
• Chapter 10.3- Emerging Transfer Pricing
challenges in India
• Challenges to traditional TNMM approaches when
issue involves payment to Indian affiliate service
provider
– Do Indian affiliates take entrepreneurial risk?
– Do Indian affiliates own valuable intangibles?
• Location savings
• Marketing intangibles when affiliate bear marketing expenses
• R&D expenses
• Payments for centralized services
• Intercompany loans
POLLING QUESTION #1
• What is the nature of your most important
intercompany transactions in India?
Services provided by the parent to the Indian affiliate
Services provided by the Indian affiliate to the parent
Sales of goods to the Indian affiliate
Intercompany royalties
AGENDA
• UN TRANSFER PRICING MANUAL – INDIA
CHAPTER
• PROVISION OF SERVICES BY INDIAN
AFFILIATES AND SUCCESSES BASED ON
TNMM
• LITIGATIONS INVOLVING DISALLOWED
DEDUCTIONS
• INTERCOMPANY LOANS
• Q AND A
THREE CASES ON PROVISION OF SERVICES
• GAP International Sourcing (India) Private Limited
– Provision of procurement services
– Taxpayer used TNMM to justify operating expenses + 15%
– Authority wanted commission = 5% of goods sourced
• Cheil Communications India Pvt. Ltd.
– Should markup applied to total costs or value-added
expenses
• Carlyle India Advisors Private Limited
– Provision of investment advisory services
– Appropriate selection of comparables
GAP INTERNATIONAL SOURCING
• Assumptions
– Goods sourced = $1.5
billion
– Operating expenses =
0.6% of goods sourced
• Alternative Positions
– Taxpayer argued for a
commission rate near
0.7%
– Tax authority argued for a
commission rate = 5% of
goods sourced
– Did affiliate own valuable
sourcing intangibles?
Millions $ Taxpayer Tax Authority
Volume $1,500.00 $1,500.00
Commission $10.50 $75.00
Operating expenses $9.00 $9.00
Operating profits $1.50 $66.00
CHEIL COMMUNICATIONS INDIA PVT. LTD.
• Cheil Communications (Korea)
is an advertising agency
• Total costs include operating
costs and payments to 3rd
parties
• Overall return to operating
costs = 8.76% but return to
total costs = 2.07%
• Tax authority wanted to impose
arm’s length markup to India’s
total costs
• Tribunal ruled in favor of
taxpayer’s return to value-
added expense PLI
Billion won 2006 2007 2008 Average
Billings 1848 2000 2671 2173
Payments to 3rd
parties 1296 1485 2098 1626
Net revenue 552 515 573 547
Operating costs 492 475 540 502
Operating profits 60 40 33 44
CARLYLE INDIA ADVISORS PRIVATE LTD.
• Indian affiliate provided investment advisory
services
• Taxpayer used TNMM with a reasonable set of
comparable service providers to show operating
expense + 15% was reasonable
CARLYLE INDIA ADVISORS PRIVATE LTD.
• Tax authority argued for operating expense + 80%
with inappropriate set of alleged comparables
including:
– Investment bankers that provide a wide array of risk-
embedded services, which are compensated by a premium
as against the affiliate who is simply advising clients, an
activity which involves considerably less risk
– Merchant bankers which provides capital to companies in
the form of share ownership rather than loans (venture
capitalists)
POLLING QUESTION #2
• If Indian tax authorities imposed a transfer pricing
adjustment increasing your Indian affiliate’s
income, how would you react?
Simply pay the extra tax
Fight the transfer pricing adjustment in Indian courts
Appeal to the IRS for Competent Authority relief
Pursue a bilateral APA
AGENDA
• UN TRANSFER PRICING MANUAL – INDIA
CHAPTER
• PROVISION OF SERVICES BY INDIAN
AFFILIATES AND SUCCESSES BASED ON
TNMM
• LITIGATIONS INVOLVING DISALLOWED
DEDUCTIONS
• INTERCOMPANY LOANS
• Q AND A
DISALLOWANCE OF SERVICE CHARGES
• Taxpayer Losses
– M/s Gemplus India Pvt. Ltd. Vs. ACIT
– Deloitte Consulting India Pvt. Ltd. vs. DCIT
• Taxpayer Wins
– Dresser-Rand India (P.) Ltd. Vs. ACIT
– M/s Ericsson India Pvt. Ltd. Vs. DCIT
– McCann Erickson India Pvt. Ltd. Vs. ACIT
• Key Issues
– Did Indian affiliate prove the receipt of alleged service?
– Did Indian affiliate benefit from the receipt of the services?
– Was the payment consistent with the arm’s length standard?
MARUTI SUZUKI INDIA LTD. V. ACIT
• Facts
– Suzuki Motor allowed Maruti to use its name in conjunction
with the Maruti name for the production and sale of cars in
India
– Maruti incurred marketing expenses that were less than 2%
of sales
• Tax Authority Position
– Suzuki was a weak brand piggybacking on the use of the
Maruti name, which led to the disallowance of royalties
from Maruti to Suzuki
– Suzuki owned Maruti for the cost of marketing plus an 8%
markup
MARUTI SUZUKI INDIA LTD. V. ACIT
• Tribunal Ruling
– Tribunal found the payment of royalties to be reasonable
– Tribunal also argued that Maruti – not Suzuki – received
the benefits of its marketing expenses
LG ELECTRONICS INDIA PRIVATE LTD. V. ACIT
• Affiliate of Korean parent – licensee that pays
parent royalty = 1% of sales for technical
information and designs
• Incurs advertising, marketing and promotion (AMP)
expenses equal to 3.85% of sales
• Average AMP expense/sales for “comparables” =
1.39% of sales
LG ELECTRONICS INDIA PRIVATE LTD. V. ACIT
• ACIT inferred that Indian affiliate provided brand
promotion services to Korean parent = (3.85% -
1.39%) sales and required I/C payment equal to
this amount plus a 13% markup
• While Korean parent was deemed to the owner of
brand, how did the parent receive any benefit from
Indian market?
POLLING QUESTION #3
• When preparing transfer pricing documentation,
who would you most likely rely upon?
Your own internal professionals
An accounting firm
A law firm
Another outside consultant
AGENDA
• UN TRANSFER PRICING MANUAL – INDIA
CHAPTER
• PROVISION OF SERVICES BY INDIAN
AFFILIATES AND SUCCESSES BASED ON
TNMM
• LITIGATIONS INVOLVING DISALLOWED
DEDUCTIONS
• INTERCOMPANY LOANS
• Q AND A
INTERCOMPANY LOANS
• Key factors for the evaluation of interest rates:
– Date loan was issued
– Term of the loan
– Currency of denomination
– Credit rating of the borrower
• Indian authorities “sophisticated method”:
– Comparison of terms and conditions of loan agreement
– Determination of credit rating of lender and borrower
– Identification of comparables third party loan agreement
– Suitable adjustments to enhance comparability
INTERCOMPANY LOANS
• For many litigations where an Indian entity has extended interest free loans to foreign affiliates, the tax authority has argued that the interest rate should be the Indian prime rate. While the Tribunals have upheld the imposition of interest, they have rejected the use of the Indian prime rate.
INTERCOMPANY LOANS CASES
• Tata Autocomp Systems Limited
– Tax authority argued for a 14% interest rate based on
Indian prime rate
– Taxpayer prevailed for a lower rate as loan was Euro
denominated
• Siva Industries & Holdings Ltd
– Tax authority argued for a 14% interest rate based on
Indian prime rate
– Taxpayer prevailed for 6% interest rate as loan was dollar
denominated
INTERCOMPANY LOANS CASES
• Tech Mahindra Limited
– Intercompany rate = 2% based on LIBOR plus 0.8% credit
spread
• VVF Limited
– Intercompany rate = LIBOR plus 3% based on BB credit
rating
– Third party loan to borrowing affiliate at LIBOR plus 3%
POLLING QUESTON #4
• What methodology do you employ to document the
arm’s length nature of your transfer pricing with
India?
– TNMM (CPM)
– Profit Split
– Comparable Uncontrolled Price
– Other
AGENDA
• UN TRANSFER PRICING MANUAL – INDIA
CHAPTER
• PROVISION OF SERVICES BY INDIAN
AFFILIATES AND SUCCESSES BASED ON
TNMM
• LITIGATIONS INVOLVING DISALLOWED
DEDUCTIONS
• INTERCOMPANY LOANS
• Q AND A
QUESTIONS
AND ANSWERS
Q AND A
ONESOURCE TRANSFER PRICING NEWS UPDATE
Upcoming Webcast:
What Will Be the Emerging Transfer Pricing Issues in
South Africa?
Wednesday, April 10th at 2 p.m. ET
Thursday, April 11th at 10:00 a.m. ET
CONTACT INFORMATION
For questions about this webcast, contact:
VANESSA TOUSSAINT
(212) 404-8695
