transfer pricing in india - skpgroup.com · winner of india tax firm of the year 2016 at the asia...
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Evolving Transfer Pricing Regulations in India
Legislation and Trends
Critical issues in India
Advance Pricing Agreements vis-à-vis Safe Harbour Provisions
Secondary Adjustments - Rationale and Impact
New Era of Alignment and Transparency
BEPS Project Action Plans - 4, 8-10 and 13
Impact of Enhanced Documentation on MNEs
Strategies to Navigate
Future of Transfer Pricing Landscape
Key Takeaways
Our Story
Coverage
215-11-2017
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Evolving Transfer Pricing Regulations in India
315-11-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Evolution of Transfer Pricing Regulations in India
415-11-2017
Introduction of Transfer Pricing
2001
Domestic Transfer Pricing
APA and Safe Harbour
2012
BEPS Action Plan 13
Secondary Adjustment
Safe Harbour rationalised
20172015/16
Alignment with global regulations
Easing of transfer pricing scrutiny
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Audits Adjustment Trends
515-11-2017
0.20 0.38 0.57
1.291.82
4.02
7.42
11.67
9.93
7.74
0
2
4
6
8
10
12
14
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0
1000
2000
3000
4000
5000
6000
7000
Nu
mb
er
of
case
s se
lect
ed
fo
r au
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Transfer Pricing Disputes Growth
Number of TP audits completed Number of adjustment cases Amount of adjustments (In USD Billion)
Ad
just
me
nt
va
lue
–U
SD
bil
lio
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Source: CBDT Annual Report 2014-15
However, the high success rate for taxpayers at the Tribunal and HC level of 69% and 86% respectively, is an affirmation of the independence and fairness of the Indian judicial system
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
• Revenue paints all licensees of brands with same brush; seeks reimbursement of excess advertisement, marketing and sale promotion (AMP) expenses
Marketing Intangibles
• Revenue applies arbitrary commission, resulting in supernormal operating profits on cost
Procurement, Marketing Functions and PE Issues
• Revenue inflicts high profits margins for contract R&D, IT, ITES, and KPO service providers
Contract Service Providers
• Revenue imputes guarantee fees charges based on credit worthinessInbound Corporate Guarantees
• Revenue challenges the actual receipt of services as well as the benefit of the same Intra-Group Services
Critical Transfer Pricing Issues in India
615-11-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Advance Pricing Agreements
715-11-2017
Concept of Advance Pricing Agreements (APA) introduced in India by the Finance Act, 2012
Average time for conclusion of unilateral APA is around 1.5 - 2 years (as compared to global standard of around 3 years)
More than 800+ applications have been filed till date - 90% of pre-filing applications got converted to ‘formal’ APA
applications and 85% of the applications are for unilateral APA
APAs concluded so far pertain to various segments like captive service centres in India, manufacturing activities,
telecommunication services, oil exploration services, management cross charges, healthcare, media, etc.
184 APAs concluded till Nov 2017, including 13 bilateral APAs – 5 with Japan, 8 with United Kingdom
Indian Revenue has clarified that absent the provisions of corresponding adjustment in TP matters (generally embodied
in Article 9(2) in any tax treaty) India shall not entertain any bilateral APA with respect to transactions involving such
country
Future of Indo-German Bilateral APA is hanging absent corresponding transfer pricing adjustments clause in the DTAA
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
APA Filing Key Statistics | 2012-13 (FY) – 2016-17 (FY)
5 4
55
88
152
5 3
53
80
141
0 1 28 11
0
20
40
60
80
100
120
140
160
2013 2014 2015 2016 Total
Total APA Unilateral APA Bilateral APA
815-11-2017
Year 1 | 2013 Year 2 | 2014 Year 3 | 2015 Year 4 | 2016 Year 5 | 2017
146 Applications 232 Applications 206 Applications 132 Applications 99 Applications
117 U 192 U 14 B 113 U 19 B 78 U 21 B29 B 206 U 26 B
To
tal
AP
As
Sig
ne
d
Source: Annual Report 2016-17 – Ministry of Finance
AP
As
Fil
ed
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Safe Harbour Rules
915-11-2017
Introduced in 2013, original safe harbour rules hardly received any positive response as compared to the phenomenalsuccess of Advance Pricing Agreement (APA)
Taking a cue from the above there was a rationalisation to the Safe Harbour Rules in 2017
Eligible Transaction Earlier Safe Harbour Revised Safe Harbour
Software Development and ITeS 20.00% - 22.00% 17.00% - 18.00%
Knowledge Process Outsourcing 25.00% 18.00% - 24.00%
Intra-Group LoansSBI Base Rate + (150-300 b.p.) SBI Base Rate + (175 – 425 b.p.)
6m LIBOR + (150 – 400 b.p.)
Corporate Guarantee 1.75% - 2.00% 1.00%
Research and Development Services 29.00% - 30.00% 24.00%
Manufacture and Export of Auto Components 8.50% - 12.00% 8.50% - 12.00%
Low Value Intra-Group Services NA 5.00%
Revised Safe Harbour provisions are made applicable with a upper turnover threshold of USD 31 million for all contract services
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Implications of Reduced Safe Harbour Rates vis-à-vis APAs
1015-11-2017
Putting a threshold for eligibility – revised safe harbour is meant to benefit SME contract service provider entities
Tax authorities can now concentrate more on complex and high-value transactions under APAs and for scrutiny -considering the risk based assessment selection
Offering a safe harbour for low value adding intra-group services – one of the most litigation prone transactions is a positive move and it seems to be in line with the BEPS Action Plan 8-10
However, considering various excluded services there is still caution/clarification required in this area
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Secondary Adjustments
1115-11-2017
Once Secondary Adjustment Provisions are triggered the Indian Co. is required to ensure the primary adjustment is recovered from the AE within the time limit
Interest to be imputed in case of failure to repatriate within the time limits mentioned above
Nature of Primary Adjustment Time Limit for Repatriation
Suo-moto adjustment made in return of income
90 days from the due date of filing of a return of income
Advance Pricing Agreement (APA) entered
Safe Harbour Rule (SHR) exercised
Mutual Agreement Procedure (MAP) entered under a Double Taxation Avoidance Agreement (DTAA)
Transfer Pricing Adjustment made by the relevant authority in the relevant order90 days from the date of order (order by the assessing officer or the relevant appellate authority)
Currency of International Transaction Interest Base Rate Spread Effective Interest
Indian Rupee 1 year marginal cost of funds (for SBI Lending Rate) 325 basis points 11.25% p.a.
Foreign Currency 6-month London Inter-Bank Offered Rate (LIBOR) 300 basis points 4.42% p.a
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Secondary Adjustments
1215-11-2017
Indian entity renders captive marketing and sales support services for the group
Remuneration in the form of commission based on percentage of sales.
Indian entity net results are losses – unable to achieve desired levels of sales
Comparable third party commission arrangements not available in the group
Set of comparable sales support companies in India showing a net 8-10% profits
In order to continue with the arrangement and to avoid falling under the ambit of secondary adjustment provisions in India, the group would need to decide whether it should:
1. Increase the commission rate so that Indian entity reaches to an arm’s length rate of margins
2. Record the increased commission income as a receivable in the books of accounts itself
3. Re-evaluate the remuneration model for future years – commission based to cost plus basis, depending specific facts of the case
Overseas Parent Co.
Indian Subsidiary
Providing marketing and sales support services on commission basis
Relook inter-company transactions for the presence of any potential primary adjustments (non arm’s length conditions) and determine the consequential impact of secondary adjustments
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New Era of Alignment and Transparency | BEPS Project
Action Plan 4 Limiting Interest Deductions Action Plan 8-10 Aligning Value CreationAction Plan 13 CbCR
1315-11-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Applicability
From AY 2018-2019 (Section 94B Introduced)
Applicable to Indian Companies and Indian Permanent Establishments (PE) of foreign entities
Not Applicable to companies engaged in banking and insurance
Applicable for debt extended by foreign related party; or by third party lender (if backed by implicit or explicit guarantee given; or deposit placed, by foreign related party)
Restricts deduction in respect of expenditure by interest (or of similar nature) paid to non-resident associated entities to 30% of EBITDA (earning before interest, taxes, depreciation and amortisation)
Threshold limit: interest expenditure exceeds USD 0.16 million
Interest over the 30% limit could be carried forward and set-off for up to 8 subsequent years
Action Plan 4 | Limiting Interest Deductions (India’s Perspective)
1415-11-2017
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Limiting Interest Deductions (Computation Mechanism for Disallowance)
1515-11-2017
Set-Off of Excess Interest – whether treatment same as un-absorbed depreciation or carried forward loss?
Particulars Scenario 1 Scenario 2 Scenario 3 Scenario 4
EBITDA 100 100 100 -100
30% of EBITDA (a) 30 30 30 NA
Interest paid to AE (b) 15 20 20 10
Interest paid to Non-AE (c) 25 40 10 10
Total Interest (d=b+c) 40 60 30 20
Total Interest in excess of 30% of EBITDA
10 30 0 20
Excess Interest to be disallowed and carried forward (lower of b or e)
10 20 0 10
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Action Plans 8 to 10 | Aligning Transfer Pricing with Value Creation
1615-11-2017
India’s stand on economic activity based transfer pricing gets further strengthened
‘Aligning rewards with the actual conduct’ and ‘substance over form’ have been raised by revenue authorities and adjudicated by the tax tribunals in India
More focus on intangibles – returns generated should be correctly shared with companies who in reality perform value adding functions or bear the actual risks in development of those intangibles
Transfer pricing cannot remain a merely principle driven tax compliance activity any more. It will touch upon the entire domain of the business, starting from the strategy to the ground level operations.
Business arrangements would need a close evaluation:
Captive high end R&D services in India remunerated on cost plus basis
Limited Risk Distribution in India, remunerated with a guaranteed low level margins
Indian distributor performing excessive brand building and not getting remunerated from the group for such activities
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Action Plan 13 and Enhanced Documentation Requirement
1715-11-2017
Indian Transfer Pricing Regulations introduced a three-tiered standardised approach to documentation in lines with Action Plan 13
of BEPS (w.e.f. FY 16-17) under Section 92D and Section 286 of the Income Tax Act 1961
• Local country TP documentation
• To be prepared by each local entity and submitted to local Tax Authority
• In place in India since 2001
Local File
(Rule 10D)
• High level blue print of multinational group’s global operations
• Contents like value drivers, supply chain model, Intangibles details, Group financing, etc.
• Prepared centrally; submitted with Tax authorities of all countries
• Ideally prepared by ultimate parent for consolidation
Master File
(Rule 10DA)
• Multinationals having consolidated annual revenue > Euro 750 million
• Summary data and economic activity in each country
• Prepared by ultimate parent for consolidation purposes
• Submitted with tax authority of ultimate parent
• Shared with other tax authorities through automatic exchange of information
CbC Report
(Rule 10DB)
Penalties for non-compliance are huge
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Master File (u/s 92D - Rule 10DA)
1815-11-2017
Master FileOrganisational
Structure
Description of Group’s
business (es)
Group’s important
profit drivers
Intangible property
strategy and policy
Intercompany financial
activities and policy FAR of key
group entities
Description of Supply chain
Group’s financial and tax positions
Effective date- 1st April 2016 (applicable for FY 2016-17 and onwards) Threshold:
1) Consolidated group revenue > INR 500 Cr (Euro 65.4 Mi.); AND
2) Aggregate value of international transactions > INR 50 Cr (Euro 6.5 Mi.) ORTransactions related to intangible property > INR 10 Cr (Euro 1.3 Mi.)
Compliance:
1) Filing in Form 3CEAA (Part A &
B) by 30th November (for FY
16-17 it is 31st Mar 2018)
2) Intimation in Form 3CEAB
(1 March 2018)
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Country by Country Reporting (u/s 286 - Rule 10DB)
1915-11-2017
CbCR
Overview of allocation of income,
taxes and business activities (no of employees and
tangible assets)- tax jurisdiction wise
List of all constituent entities including
main business activity – tax jurisdiction wise
Additional information
Effective date- 1st April 2016 (applicable for FY 2016-17 and onwards) Threshold:
Consolidated group revenue > INR 5500Cr (Approx. Euro 750 Mi.)
Compliance:
1) Intimation in Form 3CEAC (31 Jan
2018)
2) Filing in Form 3CEAD by 30th
November (for FY 16-17 it is 31st Mar
2018)
3) Intimation in Form 3CEAE for
multiple constituent group entities in
India No timeline mentioned in the
rules. It needs to be clarified by the
CBDT.
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Entire global scope is present before the Indian tax authority – would lead to more questions and detailed enquiries at the time of audit
Migrating from old transfer pricing requirements (country specific documentation) to new requirements could be daunting – initial years are crucial
In cases where Master File has been prepared for other jurisdiction, aligning the same with Indian requirements
Uncertainties over tax authorities’ approach on rise
Increased disclosure will have impact on other tax areas – treaty benefits, PE profit attributions, anti-abuse provisions
Countries (such as India) where on ground quantum are huge (market size, human resources, customer/vendor base) would gain more force
Combined Contents of Master File and CbCR having far reaching implications
Sum of the parts is more powerful than individual parts
Enhanced Documentation Requirement | Impact on MNEs Operating in India
2015-11-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Positives
Opportunity to streamline transfer pricing policies, processes and documentation
Opportunity for tax optimisation, if there are present leakages
Bringing in efficiency – avoiding duplications, efficient benchmarking and updations
Help in explaining the group transfer pricing story to aggressive tax jurisdictions
Inputs for business strategic decision making
Approaching the reality – there are positives also
Enhanced Documentation Requirement | Impact on MNEs Operating in India
2115-11-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Potential questions from Revenue authorities after perusing Master File / CbCR
Inbound Arrangements
Enhanced Documentation Requirement | Impact on MNEs Operating in India
2215-11-2017
Scenario Potential Questions
Payment of royalty by Indian subsidiary
Whether entity charging royalty is actually carrying out any economic activity [Development, Enhancement, Maintenance, Protection, Exploitation (DEMPE) functions]?
Whether Indian entity received any economic benefit from availing the brand/technology
Contract R&D/captive services rendered by Indian subsidiary
More enquiries on following aspects:- Department wise bifurcation of employees- Qualification of employees- Services defined under inter-company agreement- Role played by Indian entity in entire value chain
Whether remuneration for the Indian entity matches with the FAR contribution it makes? Profit split more suitable?
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Strategies for Initial Preparedness
Prepare group’s global map and plot transfer pricing legal requirements in each individual country
Determine applicability of CbCR and master file for every group entity
Define roles and responsibilities within the group to comply with country specific and group level requirements
Perform skill gap analysis – in-house capabilities and transfer pricing specialist help
Evaluate the preparedness of data collation systems in the group
Define a system for real time/periodic monitoring of data
Prepare a calendar for compliances, transfer pricing benchmarking searches and updates
Enhanced Documentation Requirement | Strategies to Navigate
2315-11-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Strategies to Mitigate Risk and Being Future Ready
Appropriate interpretation of group wide data collated
Perform what-if analysis for the potential questions/inquiries from the tax authorities
Make appropriate changes in the transfer pricing policy, where required
Define a system to gather real time evidences that will support the policy - developing justifications
Design a system of regular communication between tax teams and business strategy/operations team
Systems in place to track additional information i.e. addition of new entity in the group, supply chain changes, etc.
Give a harmonised picture between
CbCR, Master file, and local files
Year-on-Year disclosures in transfer pricing documentation
Aim for a fine balance between
Protect trade secrets and provide sufficient information
Standardisation and customisation
Enhanced Documentation Requirement | Strategies to Navigate
2415-11-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Use of technology for collation of data and use of data analytics for transfer pricing risk detection
Collating information through exchange of information and coordinated audit by representatives from two or more jurisdictions
Tax and business and operations team should work in sync as there could be use of subject matter expert witnesses during audit
Not to treat transfer pricing as year end compliance exercise
Having substance based transfer pricing policy with emphasis on establishing fundamentals of transfer pricing instead of legal arguments
Reviewing inter-company transfer pricing policy on regular intervals
Evaluating option of Advance Pricing Agreements
Seeking timely advice of transfer pricing experts
Transfer pricing documentation is no more a standard data driven exercise. It is designing and telling a story.
Enhanced Documentation Requirement | Future of Transfer Pricing Landscape
2515-11-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Plot and re-look at shareholding and operating structure of your group
Having a tax-efficient transfer pricing policy for the group as a whole
Adequate implementation of the transfer pricing policy
Impact of transfer pricing policy on other areas
Ensure coherence and compliance of local and global laws
Required enhanced documentation in place – on ground details would be crucial
Timely assessment of transfer pricing risks for any change in the business and taking measures to mitigate the same
Key Takeaways
2715-11-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
SKP Today
2915-11-2017
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