Developments in Transfer Pricing

TransPrice Knowledge Alliance

Akshay KenkreManaging Partner

Outline

1. Our Journey till date

2. Introduction to ‘TransPrice Knowledge Alliance’

3. Agenda for FY 2014-15

4. TP Overview including documentation

5. Recent developments

6. Summary of key assessment issues – Topic for future discussions

7. Synthesis Group

8. Conclusion and vote of thanks

2

3

Journey till date

Our Journey

4

Established on 03-03-13

Objective: To value add to the industry with specialist knowledge

Conducted first annual event ‘INDIA Transfer Pricing Summit – 2013’

Stress on subject matter expertise and extensive research

Research paper on ‘Intangibles – with emphasis on marketing intangibles’

‘TransPrice Weekly’ : An Initiative to keep industry updated

Trained PAN India CAG team

100% success results at representations

5

TransPrice Knowledge Alliance

TransPrice Knowledge Alliance

6

Vision :

1. Build an advocacy group in Transfer Pricing, to represent the industry at

large, at appropriate forums

2. Spread awareness and share knowledge on Transfer Pricing

3. Update industry on real time basis

4. Experience sharing from the assessment and litigation

5. Arrive at and suggest plausible solutions for Transfer Pricing issues

6. Offer Networking platform for the benefit of members

TransPrice’s client automatically becomes member of the forum and special

invitees to INDIA Transfer Pricing Summit- 2014, to be held on 8th August

7

Agenda – FY 2014-15

Agenda- FY 2014-15

8

• Frequency of Meeting : Tri-annual ( July 14, November 14, March 15)

• Topics of discussion to be considered in the year:• Technical issues like search process, comparability, aggregation of

transactions, operating/ non operating income and expenses, Economic adjustments

• Practical and industry issues like customs- TP convergence, Location savings, intangibles, royalties, guarantee commissions, interest rates, marketing support, cost sharing, share valuation

• Business specific like Pharmaceutical, R&D, Iron and Steel, Chemicals, Media and entertainment, Heavy machinery, Automobiles, Jewelry and Gems

• Amendments, New legislations , case laws

Today’s Agenda

9

• General Transfer Pricing overview

• Understanding Transfer Pricing documentation

• Discussion on latest developments in Transfer Pricing

• Topics of discussion for future meetings and fixing on the dates

10

TP Overview

Transfer Pricing - A Snapshot

11

Worldwide is one of the most complex and challenging tax domain

Anti – Avoidance law

Leads to Double Taxation

Impacts every element of supply chain

India accounts for approx 70% of world TP litigation

One of the countries having strong view on TP regulations

Direct impact on the companies Effective Tax Rate (ETR)

Penalty implications

Trends in TP Assesments in India

12

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

0

10000

20000

30000

40000

50000

60000

70000

80000Adjustment (Rs Crores)

Years of Transfer Pricing Assessment

High adjustments on account of issues like corporate guarantees, marketing intangibles, share transfer

239 337 471 84670

813

1138

1343

3200

Number of cases

Objective

13

MaximizationMNE

Maximize profit subject to Arms length principle

Maximize overall profits as compared to how an independent parties would operate

Maximize group profits by diversifying functions around locations

Revenue Authority

Profit maximization by using lowest / highest possible ALP

Balancing of taxes and investment/ growth in a country

Direct and short term vs. Long term benefits and growth

TP is anti avoidance law and not basis of charge

• Appropriate Documentation

• Effective and risk evaluated structuring and diversification

• Effective tax supply chain management

`

Profit Revenue

Fixing TP vs. Testing TP

14

TP Process

Fixing Transfer Prices Testing Transfer Prices

Includes:• Planning Stage• Understanding the FAR and

characterizing the entity• Setting up of TP policy and

agreements (MM or CP)• Active negotiations with AE for

price setting• Setting Transfer Prices• Documenting is the key

Includes:• Post year end activity• Confirming and auditing FAR,

policies, agreements• Compliance as per Tax laws• Benchmarking/ Economic analysis• Testing methods can be different

than fixing methods• Maintenance of TP Study before

due dates

Documentation – Fixing stage

15

• Transfer Pricing Policies including price setting mechanism

• Intercompany agreements

• Negotiation mails and discussions

• If a budgeting method is followed, then such procedure

• Contemporaneous documentation

• Documentation in Rule 10D format if international transactions exceeds Rs

1 crore

• Limit of Rs 15 crore – only for reference to the TPO, below 15 crores- AO

bound to do transfer pricing assessment

• The limit is set only through an internal circular and it is not a rule

• Selection and reference to TPO is purely on risk basis and not amount of

international transaction

Documentation – Testing stage

16

Transfer Pricing is all about comparability and documentation

Transfer Pricing Documentation, including: Identification of international transaction and Industry Analysis Functional , Risk and Assets Analysis Economic Characterization Economic Analysis ( Selection of MAM – Comparability – Arms Length) Conclusion on ALP

Preparation of preliminary benchmark studies

Transfer Pricing Accountant’s report – Form 3CEB

Transfer Pricing report drafting and generating back up documentation

Due date for maintenance and filing for 31 March 14 is 30 November 2014

Compliance and Documentation

17

1 Apr 13 31 Mar 14 30 Nov 14 30 Sep 15 31 Jan 18 31 Mar 24

Beginning of Tax year

Close of Tax year

Due date of maintaining TP documents and

Accountant’s report

Limitation of initial assessment

Limitation of completing TP

assessment

Requirement until which FY 2013-14

documents required to be maintained

Timeliness

18

Recent developments

Definition of International Transaction

19

Retrospective and clarificatory amendment (w.r.e.f 2002) to include transactions :

• Purchase , sale , transfer, lease use of tangible property

• Purchase, sale, transfer, lease, use of intangible property

• Financing including loan, guarantee, securities, debts, advance payments etc

• Any type of provision of service including market development, service,

administration etc

• Structuring , restructuring, reorganization (covers issue of shares), irrespective of

the fact that the same has bearing on profits or not

Further the definition of intangible property has been elaborated to include all and

any types of rights having a commercial backing

Specified Domestic Transactions

20

Genesis to the Glaxo case

Allowance for expenditure or allocation of cost or expense or any income related to SDT to be computed with regard to arm’s length price (‘ALP’)

Applicable from Financial Year (‘FY’) 2012–13 onward

SDT defined as any of the following transaction (s) that are not international Transactions:

Payments to related parties as defined under section 40A (2) (b) of the Income Tax Act, 1961 (‘Act’)

Tax holiday-related transactions (eligible business- 10AA, 80IA, 80IB, 80IC, 80IE, 80ID) – Both Income as well as expenditure needs to be tested

Tax payers to maintain appropriate TP documentation

Monetary threshold of INR 5 Crores in aggregate

APA introduction- Historic Scenario

21

Aggressive Positions adopted by Transfer Pricing Office

Ignored FAR, business, industry and economic realities

Adoption of standard industry wise position:

IT/ ITES industry : 25%- 35% cost plus mark up Contract R&D : 30% cost plus mark up Clinical Trials: 30% cost plus mark up Marketing Intangibles: cost plus/ profit split method Loan Transactions: use of Indian loan rates Corporate Guarantees: adhoc rate without credit analysis

APA introduction-Litigation Roadmap

22

Litigation Options

DRP/ CIT (A) ITAT High Court Supreme Court APA

Defensive Progressive

Transfer Pricing is the biggest challenges faced by MNCs in India

Finance Act, 2012 – APA Introduced

23

2010 • APA introduced in proposed DTC, 2010• The implementation of DTC itself failed

Feb 2012• Much awaited APA was then introduced in

the Finance Act, 2012• Basic Framework provided in the Finance

Act, 2012

Aug 2012 • Detailed APA Rules introduced

APA Regulations

24

Insertion of Rule 10F to 10T and Rule 44GA Applicability : All persons, undertaking or planning to undertake international

transaction

Types of APAs

APA

Unilateral APA

Bilateral APA

Multilateral APA

Solely between taxpayer and tax authority

Mutual agreement between CA of two tax administrations

More than one Bilateral agreement

APA procedure

25

Application of APA: Entered by CBDT with taxpayer, after approval of CG

Taxpayer

APA Team ( APA Directors &Officers)

DG International Taxation

Competent Authority

Board Approval

Competent Authority

Associated Enterprise (AE)

Experts from Economics, statistics, law etc.

INDIA Outside INDIA

APA Process

26

Phase 1Decide to enter the APA (feasibility analysis)

Phase 2Prefilling consultation with the Tax Authorities

Phase 3APA Application

Phase 4Negotiation Stage

Phase 5Finalization of APA

Phase 6Furnishing of Annual Compliance Report

Timing of application:

APA for transactions in FY 2014-15 : Application to be made before 1 April 2014

Incase of other transactions ( new or proposed transactions) , any time before undertaking the transactions

Tolerance Band

27

FA 2012 provided that benefit of the tolerance band will not be available

if the difference between ALP and International Transaction is greater

than +/-5%

April 2013, the tolerance band was revised to +/-3% of transactions price

and +/-1% of transaction price in case of wholesale trader

Other Amendments

28

TPO can question and audit any transaction that is not reported by the

taxpayer

Industry visits by the TPO permitted to check operations and

contemporaneous documentation

Penalty @ 4% of international transactions ( earlier was 2%)

Penalties applicable for SDT transactions

Applicability of 6th Transfer Pricing Method Rule 10AB – Any other

method : includes transactions of unique nature for which application of

other 5 method is difficult. Valuations, guarantee methods etc.

E- Filing of Form 3CEB

29

Key assessment issues

Key issues – Topics for future discussions

30

Marketing Intangibles ( advertising, marketing and promotional

expenditure)

What are marketing intangibles

Guidance around the same

LG case

Research and Development services

Importance of allocation of FAR

Importance of function vis-à-vis risks

Identification of risk bearing entities

Transfer of intangibles

Circular 5 & 6 issues by CBDT

Key issues – Topics for future discussions

31

Management cross-charge

Concept of intra group services and management fees

Importance of policies and agreements

Documentation to justify benefits rendered and cost allocated

Financial Transactions

Provision and receipt of loans

Provision and receipt of corporate guarantee

Issue of share capital and transfer of shares

Location savings

Key issues – Topics for future discussions

32

Other Issues:

Data availability

Internal and external comparable

Loss making scenario

Use of custom data

Secret comparables

Economic adjustments like working capital, risks, depreciation,

capacity

Cost allocations

Penalties

Sourcing support and indenting

Benchmarking royalties

33

Our Group

Our Group (1 of 2)

34

Intellivate Capital, provides an entire spectrum of services in Investment Banking, Project Management, Fund Raising and Management

Aurum Capital handholds the SME sector with structured and unstructured debt to finance their operational activities through cash credit, working capital and term loans

Manish Modi & Associates is a Chartered Accountancy firm providing services in areas of Audit and Assurance, Compliance, Regulatory and Consultancy including finance and tax consultancy

Our Group (2 of 2)

35

TransPrice Solutions is a specialist organization, with core focus on Transfer Pricing. It provides expert advisory, representation and compliance solutions in Transfer Pricing arena

Brianna Knowledge Resources is a corporate training platform in the field of finance. It is a creation of industry professionals who bring in a synergy of knowledge bases and real time experiential learnings to the training platform

Pinnacle Education is a educational training institute molding thousands of aspirants up to Final CA

36

Contact Us

37

CA. Akshay KenkreManaging Partner

TransPrice Solutions LLP

Address: Gita Building, 2nd floor,

Plot no. 92, Next to HP Petrol Pump, Sion (East),

Mumbai - 400022

Tel : 022 - 2409 3737/ 409 7171 Mobile : + 91 9819245424

Email : akshaykenkre@transprice.in info@transprice.in