On February 28, India’s finance minister, Arun Jaitley, made his budget speech, which highlighted the country’s desire to boost the economy and attract foreign investment.
Despite the high number of regulatory transfer pricing complications in India, however, there was little in this respect for taxpayers to grasp onto in the budget speech:
· Domestic transfer pricing threshold limit increased from Rs 50 million ($ 809,131) to Rs 200 million;
· Modification of permanent establishment (PE) norms so that the mere presence of a fund manager in India does not constitute a PE;
· Implementation of tough penalties for tax evasion; and
· Clarifications by the tax department on the indirect transfer of assets and dividend paid by foreign firms.
“From a transfer pricing perspective, the only significant change proposed is increasing the threshold limit for applicability of specified domestic transactions. This proposal would relieve a large number of small taxpayers from the hardship of transfer pricing compliances due to a higher threshold,” said Samir Gandhi, transfer pricing leader at Deloitte Haskins & Sells.
Disappointing budget
“The budget has been a disappointing one from a transfer pricing perspective. In fact it seems that the finance minister kept transfer pricing provisions at arm’s-length in his budget,” said Maulik Doshi of Sudit K Parekh & Co.
Although increasing the threshold for application of domestic transfer pricing provision from 50 to 200 million rupees is somewhat welcome news, there is no other relief or clarification provided.
“In order to reduce the compliance costs, there was an expectation that domestic transfer pricing would be done away with, especially in cases involving no tax arbitrage between the two entities. The government, however, has decided to give partial relief by extending the threshold limit,” said Subhankar Sinha, senior vice president, head of tax South Asia at Siemens.
Advance pricing agreement (APA) rules are still pending even though roll back provisions are applicable from October 2015. The situation is mirrored in the use of the interquartile range and multiple year data where provisions are applicable from March 2015 but the rules have yet to be announced.
“The much awaited rationalisation of safe harbour norms and clarifications on interquartile range and use of multiple year data have not found place in the budget proposals which would have aligned the Indian transfer pricing regulations with international practices,” said Gandhi.
“With just a month away from the end of the financial year, corporates have been put in a very precarious scenario,” said Doshi.
In addition to APA rules and the use of range and multiple year data, there have been no amendments to regulations in light of the Bombay High Court’s ruling in the Vodafone case.
“Additionally, the finance minister has not done anything to reduce litigation or provide clarity on a number of issues such as marketing intangibles, working capital, risk and other economic adjustments, benchmarking of financial transactions etcetera,” added Doshi.
Although India has taken significant steps to improve its tax climate, unresolved issues regarding transfer pricing are sure to hinder India’s attempts at attracting foreign investment.
Cautious approach down to OECD’s impending recommendations
While many are disappointed the Indian government has done little to clarify transfer pricing issues, others acknowledge a lack of reform but put it down to India’s desire to wait for the OECD’s final recommendations on BEPS in September.
“The Indian revenue has behaved in an extremely mature manner by resisting the temptation of introducing some unilateral measures ahead of the completion of the OECD’s BEPS project,” said Sinha.
The government’s decision to defer GAAR by two years reflects India’s desire to incorporate the final recommendations of the BEPS project into their own tax and transfer pricing policies.
“Hopefully by this time, the government will make good progress in reforming the tax administration on the lines suggest by the Tax Administration Reform Commission (TARC),” added Sinha.
Unlike countries such as the UK, Australia, and Canada, India seems keen to wait for the OECD’s final recommendations before implementing any significant tax reforms.
