Local tax environment
India has been consistently moving towards a non-adversarial tax regime. Efforts taken in this regard include measures to curb litigation on controversial matters such as transfer pricing treatment of issuing securities at premium and applicability of a minimum alternate tax levy to foreign companies.
The emphasis on the non-adversarial environment is aligned with India's commitment to have a stable and predictable tax regime in India, for both foreign investors and Indian taxpayers. The steps taken towards the simplification and rationalisation of taxation and reducing litigation are likely to have a far reaching impact on the transfer pricing litigation scenario in India. Some of the key developments (procedural as well as legislative) are discussed below.
- Introduction of the 'Range' concept and the use of 'Multiple Year Data': This is expected to help in reducing TP litigation since the comparability analysis undertaken using the 'arithmetic mean' and 'current year data' has been a contentious issue in India. Through this major change in the legislation, India has tried to align its transfer pricing regulations with international best practices. These provisions allow the use of preceding two years data and in certain circumstances, the use of range from thirty-fifth percentile to sixty-fifth percentile.
- Additional criteria for selection of cases for TP scrutiny: India's tax authority has issued new guidelines for the implementation of transfer pricing provisions relating to scrutiny/audits. These guidelines prescribe additional mandatory criteria to select transfer pricing cases and have replaced the 'Monetary threshold' based scrutiny case selection parameters with 'risk based' parameters. We believe that this step could result in the selection of fewer cases year on year for rigorous transfer pricing scrutiny by the field officer. The guidelines also provide clarity on the roles and powers of the Assessing Officer (AO) and the TPO.
- Faster dispute resolution through Advance Pricing Agreement (APA) and Mutual Agreement Procedure (MAP) route: India has put its APA and MAP programmes on the fast track. The subsequent section contains more details in this regard.
- Reduction in TP adjustments: Overall, the agenda of the present government to make the environment more taxpayer friendly has resulted in a much smaller amount of transfer pricing adjustments during the recently concluded transfer pricing audit round relating to FY 2011-12.
- Reduction in penalty rates: Recognising high penalties as the main reason for income-tax litigation, India announced a series of measures to reduce the penalty percentage and encourage taxpayers to settle disputes expeditiously. This includes reduction in the maximum penalty rate from 100-300% to 50-200% (The Finance Act).
Many areas for improvement do exist even in case of the above mentioned steps already taken for creating a taxpayer friendly environment in India. However, India's intentions are clear – making itself a preferred destination for investments and improving the ease of doing business.
Update on Dispute Resolution Mechanisms – APA and MAP
India signed about 64 APAs until March 2016 and is learnt to have set an aggressive target during the FY 2016-17 for resolving issues through this route. A record 55 APAs were signed in the FY 2015-16 alone (Government looks to resolve 100 transfer pricing issues, seeks to sign more advanced agreements:The Economic Times). It is expected that some more complicated APAs will be signed during FY 2016-17. The APAs signed so far include bilateral APAs involving the competent authorities of other countries.
Also, It is now clear that the APAs have a persuasive value in the Indian courts of law and tax appellate tribunals. There have been instances where due weightage was given to the APA signed by the taxpayers for subsequent years. (Delhi High Court ruling in the case of PCIT v. Ameriprise India Pvt. Ltd. And Delhi Bench of Income-tax Tribunal's judgment in case of Ranbaxy Laboratories Limited v. ACIT). This will set a positive precedent for cases pending at the lower appellate authorities.
MAP has also emerged as an effective alternative tax dispute resolution mechanism in India. In the last two years, India resolved 180 cases under this route. The total amount of income locked up in dispute in these cases was approximately INR 50 billion ($750 million.). The cases pertained to various sectors of the economy such as software services, IT-enabled services, manufacturing, consultancy services, etc. The countries with which cases have been resolved are U.S.A., Japan, UK and China, according to Government of India press release dated February 16 2016.
India, being one of the pioneers of the BEPS initiative, as part of the G20 countries, has already begun aligning its tax regulations with the OECD's BEPS report. The Indian TP legislation is being amended to include specific requirements in respect of CbCR and master file documentation with effect from April 1 2016. The CbCR provisions being incorporated in the law are broadly in line with the recommendations of OECD BEPS Action 13 report. Non-compliance with these reporting provisions will attract penalties. Some of the important aspects of India's CbCR provisions are discussed below.
- In line with the recommendations contained in Action 13 of the OECD BEPS Action Plan, the following three-tiered TP documentation structure is being adopted by India:
- Master file containing standardised information relevant for all MNE group members;
- Local file referring intra-group transactions of the local taxpayer; and
- CbC report, containing certain information relating to the global allocation of the MNE's income and taxes paid together with certain indicators of the location of economic activity within the MNE group.
- Master file to be maintained and filed in India. Information requirements are likely to be aligned with the BEPS Action 13.
- Local file related regulations that already exist in the Indian law may be aligned with the recommendations of the OECD which will require additional information to be maintained by the tax payer.
- CbCR threshold is to be aligned with the international consensus of €750 million ($834 million) which is indicated in general guidance. Official rules prescribing thresholds for Master file and Local file are expected in the near future.
An Indian parent entity or Indian Resident Alternate Reporting Entity (ARE) of international group are required to file a CbC report in India, if the total consolidated group revenue exceeds €750 million, from FY 2016-17 onwards. It is expected to be file on or before the due date of filing for the Return of Income ie November 30 2017.
An Indian or Foreign parent entity including ARE may have to produce documents to determine the accuracy of CbC report.
Implications for an Indian entity with a foreign parent (Inbound)
- An Indian entity with a foreign parent to notify Indian prescribed authority on or before prescribed due date, the details of parent entity or ARE, or whether it is the ARE
- The Indian entity may have to file CbC report if:
- India does not have an agreement for exchange of the CbC report with the country of the foreign parent or ARE.
- Despite having an exchange agreement, the country of the foreign parent or ARE fails to share the CbC report.
- Master file and/or Local file to be maintained subject to the Income-tax Rules.
Implications for Indian HQ entity (Outbound)
- The Indian parent entity is obliged to file the CbC report in India, subject to a revenue threshold as discussed earlier.
- Indian parent entity may designate ARE to file the CbC report.
- Master file and/or Local file to be maintained by Indian parent entity subject to the Income-tax Rules.
As discussed in detail earlier, there are primarily two major developments which have happened in last one year in the context of transfer pricing disputes and audits. One is the government's agenda of having a non-adversarial tax regime, which has resulted in a lesser amount of transfer pricing adjustments. The other is the tax authority's circular clearly laying out the guidelines as to when a case needs to be referred for transfer pricing assessment, which has reduced the overall number of cases picked up for scrutiny.
Foreign Tax Credit Rules
While India's tax treaties and the income-tax regulations contain broad provisions enabling tax residents to claim credit for the foreign taxes paid on income which is doubly taxed, there have been no specific rules laying down the manner of computation of such Foreign Tax Credit (FTC). This has led to uncertainties in claiming such credit and at times to litigation with the Indian Revenue. The Indian Revenue has taken steps to bring in certainty in this regard and has framed rules laying down the manner of computation of the FTC.
In order to tax e-commerce transactions of non-residents, an 'Equalisation Levy' is introduced in line with the recommendations of the OECD BEPS project.
KPMG in India
Building No.10, 8th Floor
Rahul Mitra is the national head of the Global Transfer Pricing practice within KPMG India and has over 23 years' experience in taxation and regulatory matters in India. Rahul specialises in transfer pricing with a focus on inbound & outbound planning assignments, profit/cash repatriation planning, value chain transformation, supply chain management projects and profit attribution to permanent establishments.
Rahul independently handles litigation for top companies at the level of Tax Tribunals & Authority for Advance Ruling. At least 50 of the cases independently argued by Rahul in direct tax & transfer pricing matters, have been reported in leading tax journals in India. Rahul has handled several APAs in India, involving clients from across industries, covering complex transactions, e.g. industrial franchise fees under non-integrated principal structures; contract R&D service provider model; distribution models, with related marketing intangible issues; financial transactions; profit split models for royalties; etc.
Rahul was invited by the OECD to speak at the 2012 Paris roundtable conference on developing countries' perspective on APAs and was also invited by the Indian Revenue Board in October, 2015 to provide training to transfer pricing Directors and Commissioners on the topic of marketing intangibles.
KPMG in India
Karishma is a Partner in KPMG in India's Global Transfer Pricing Services and litigation team. She is a core team member of the Global Dispute Resolution group and the national think tank group for tax in KPMG in India. She leads the transfer pricing litigation group and the dispute resolution group for Direct Taxation in the western region. She has over 18 years of work experience of which 14 years are focused on Transfer Pricing with extensive representation before the Transfer Pricing Officer (TPO ), the Dispute Resolution Panel (DRP) and/or the Income Tax Appellate Tribunal (ITAT).
Karishma has been nominated amongst the top ten transfer pricing advisors in India by International tax review. She was leading the transfer pricing practice for Grant Thornton in India and had been with them for almost 10 years. During her leadership their practice was voted as the best transfer pricing practice in India during three out of five years – World Finance (2009 and 2010) and Legal awards, in 2013. Karishma has advised more than 300 clients over her professional career span in Grant Thornton. Prior to Grant Thornton, Karishma has also worked in PwC for five years.
She is specialised in advising clients in the field of pharmaceuticals and Information Technology.
She has also written numerous articles and papers for the International Tax Review, BNA, Tax Analyst, Outsourcing, Economic Times, HBL, among others. Karishma has successfully argued high stake matters having complex TP issues before ITATs which are now binding precedents in law. She is also handling complex APA and MAP engagements and have been instrumental in concluding a recent APA for the ITES sector which has one of the lowest mark-ups agreed in India so far.
KPMG in India
Building No. 10,
Rajan has 20 years of experience in providing tax advisory services to multinational corporations in areas including cross-border structuring, transfer pricing and international taxation. He has successfully led large multi-disciplinary teams on global assignments involving intricate tax issues, working closely with professional colleagues across multiple jurisdictions.
He has led global tax strategies for key businesses in countries including India, China, Singapore, Japan, Australia and New Zealand.
Rajan believes his forte lies in closely understanding businesses, strategies and key management variables. Such understanding constitutes the core of any transfer pricing analysis and forms the basis for evolving meaningful economic analysis that is grounded in commercial principles. It is this ability that helped him to successfully lead a multi-jurisdictional x-los team to design and integrate a complex TESCM (tax efficient supply chain management) project for one of his clients, which also qualified as one of India's initial few integrated projects involving end-to-end solutions on in-sourcing of multiple manufacturing lines, vendor bases and supply chains.
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