The Indian Government has, in recent past, taken bold and practical measures to align the Indian transfer pricing regulations with global best practices by introducing country-by-country reporting and “master” file regulations; interest limitation provisions; revising the rates under the safe harbor rules; rationalizing specified domestic transactions; and introduction of range concept and use of multiple-year data. Additionally, the Government has made several attempts on the administrative side to reduce litigation and introduce a taxpayer-friendly regime. Having said that, there are certain ambiguities that need to be resolved.
In the 2018 Budget, which is due to be presented on February 1, 2018, we hope to see appropriate steps being taken to address these ambiguities, some of which are listed below.
Transfer pricing documentation
The requirement of maintaining transfer pricing documentation presently applies when international transactions exceed INR10m. The compliance requirement currently puts a lot of administrative burden on the taxpayer as the current threshold is too low. The Government should look for best practices around the world and increase this threshold limit to INR50m.
The Government should further relax the requirement of preparing/carrying out the comparable analysis every year, and an update of financials of existing comparables for two to three years should be acceptable in line with global best practices. The Government could consider relaxation with regard to detailed transfer pricing report/documentation requirements and allow for the documentation to be prepared every two to three years (if the underlying facts of international transactions remain constant) as against existing requirement of preparing documentation for each financial year.
In addition, the existing inter-quartile range of 35 percent to 65 percent could be broadened to 25 percent to 75 percent to align it with global best practices. The cap on number of comparables (that is, six) for availing the benefit of range concept should be done away with as in many cases it is not practically possible to arrive/identify more comparable companies considering the peculiar nature of industry in which taxpayer operates.
CbC reporting and “master” file compliances
The Government should clarify or set out guidelines on various open issues as regards CbC reporting and “master” file compliances such as applicability of “master” file in case of foreign companies. The threshold (of group consolidated turnover of INR5bn) for applicability should be enhanced to align it with global best practices and to reduce the compliance burden of taxpayers. The Government should also look at the possibility of further extending the due date for “master” file/CbC reporting compliances (as this being the first year of compliance).
Secondary adjustment, interest deductibility
Clarity is required with reference to allocation of secondary adjustment in cases where international transactions with multiple associated enterprises (AE) are benchmarked based on the entity level net margins earned by Indian taxpayer. Repatriation of funds from AEs could create an issue from AEs perspective since the local regulations of the respective country of AEs might not permit the same.
The threshold limit of interest deduction should be enhanced from 30 percent to 50 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA). Exemption granted to banking and insurance companies should further be extended to include capital intensive industries such as real estate and Non-Banking Financial Companies (NBFCs).
Rationalizing safe harbor provisions
The Government should extend the safe harbor regulations to include services such as investment advisory services, marketing support services, and captive research and development (R&D) services other than R&D in information technology. Additionally, the rules on maintenance of documentation for taxpayers fully covered and opting for safe harbor must be relaxed to reduce unnecessary compliance burden and costs. The existing safe harbor in case of contract manufacturers of core and non-core auto components also needs to be reduced.
The Government should exclude the applicability of deemed international transactions in genuine cases where transactions are structured for commercial reasons. Common business transactions with unrelated, third parties such as global sourcing arrangements and global contract manufacturers should not be considered as deemed international transactions. Also, transactions between two resident entities should not be included in the definition because there is no tax avoidance or shifting of profits outside India.
The Finance Ministry should provide guidance and clarity on transfer pricing implications relating to the issue of marketing intangibles or advertisement, marketing, and promotion (AMP) expenses, especially guidance on cases where such AMP expenses require a separate compensation.
Guidance should also be provided on the valuation methodologies to be adopted for arriving at the arm’s length price for financial transactions such as loans and guarantees. Finally, the Government should set out illustrative guidance on computation of various economic adjustments such as working capital adjustment, risk adjustment, and capacity adjustment.
Changes in tax administration
The tax authority should issue guidelines for mandatory grant of stay in cases where there is a dispute of transfer pricing, as generally the amounts in dispute are phenomenal and most of the cases are decided in the favour of the taxpayer by appellate authorities. Steps should be taken to address the huge backlog of transfer pricing cases and dedicated benches of the Income Tax Appellate Tribunal for adjudicating pending transfer pricing cases need to be set up.
Finally, steps should be taken to strengthen the administrative mechanism of advance pricing agreements (APAs) to deal with the overwhelming response from taxpayers and concluding pending APAs promptly.