The government on Friday notified rules whereby tax authorities would accept the values quoted by MNCs in India in their transactions with associates or parents abroad if they follow stipulated principles of arms length pricing.
The Advance Pricing Agreement rules notified by the Central Board of Direct Taxes (CBDT) will also bring tax certainty to multinational firms as they would not be forced by the tax department to adjust the price at which a transaction has been undertaken. Adjustments suggested by the authorities on the value of transactions claimed by an Indian arm or parent of a global company, has led to lengthy disputes involving huge sums. Indian authorities are reckoned as tough globally in transfer pricing matters, with the country accounting for about 70% of all global transfer pricing disputes by volume.
Mudigonda Vishweshwar, senior director, Deloitte, said that if implemented with a right spirit of negotiation, the mechanism will eliminate unnecessary litigation. The rules propose fee of R10 lakh to R20 lakh, depending on the value of the transaction on which a company seeks to enter into an APA deal with the CBDT. The APA negotiating team would include experts in economics, statistics, law or any other field as nominated by the DG Income-Tax. ?This will surely complement the efforts of taxpayers and the Revenue Department in concluding APAs,? said Rahul Mitra, leader, transfer pricing, PwC India.
Industry experts welcomed the provision for the pre-filing consultation between the company and the tax department that will give the tax payer an idea of the tax department’s views on a particular transaction.
?It is good to see that the taxpayers can get a first-hand feel of the CBDT’s thoughts on proposed transactions, which the taxpayers plan to enter into with their associated enterprises,” said Vijay Iyer, partner & transfer pricing leader, Ernst & Young.
For fiscal 2011-12, the finance ministry recently allowed a 5% variation from the declared transfer price and the tax officials’ estimate of what the arms length price ought to be in a particular case. If the variation exceeds this margin, the government will adjust the price accordingly, which impacts the company’s operating profits. Such adjustments will not happen if the company signs APAs with the revenue department. Authorities maintain a close watch over transfer pricing to prevent the shifting of profits and the tax liability out of the country.
BMR Advisors chairman Mukesh Butani said the option for pre-filing to ‘test the waters’ aligns to global practices but a less elaborate procedure would have been better. ?I would like to seek an assurance that the information submitted at the pre-filing stage would not be used against the tax payers or if the APA fails, no adverse conclusion would be drawn and used against tax payers,? said Butani.
Once the company enters into an agreement, it is absolved from the future litigation and also lot of compliance procedures. The taxpayers need to file an annual compliance report every year within a month from the date of filing the income tax returns.
