The Union Budget to be presented by the new government would be in the midst of the most challenging times facing the country. Tax revenues are not keeping pace with the targets and taxpayers are facing the wrath of an aggressive tax administration bent upon maximising revenue collections through means fair and foul to meet the elusive targets. In this backdrop, many MNCs are facing huge transfer pricing (TP) litigation on the controversial issues such as infusion of capital, marketing intangibles, intra-group financial transactions, guarantee fees, etc. It is crucial to have some concrete guidance and clarity with regards to benchmarking these transactions. To add to this, the introduction of domestic TP regime has lead to manifold increase in taxpayers woes.
In addition to certain perennial issues like acceptability of multiple-year data, prohibition on the use of secret comparables, guidance on carrying out comparability adjustments (working capital/risk adjustment, etc.), increasing threshold for maintaining mandatory documentation where tax reforms are required, many changes to the domestic TP regime are also needed. Primarily, the domestic TP regime should be applicable only where there is a possibility of tax arbitrage. Domestic TP need not be applicable to directors remuneration, and if it is made applicable, clear guidance should be provided for benchmarking such remuneration. Benchmarking a transaction involving payment made to a director by a company poses numerous challenges since payments vary largely across companies and depend on several subjective factors like role, functions, qualification and experience, technical ability and the extent of ownership of the said director, business needs of the company, market scenario, etc. Further, a clarification that only revenue expenditure shall be covered within the ambit of domestic TP is required. Another issue that needs to be addressed is the allocation of costs of shared services amongst different units of the same taxpaying entity and amongst different entities of the same group.
Safe Harbour Rules (SHR) were introduced in September 2013, after extensive consultations with stakeholders, in order to reduce TP litigation and to give some comfort to the MNCs. The primary objective of Safe Harbour Rules was to ease out the compliance burden of taxpayers, curtail disputes and reduce administrative hassles for taxman. However, this scheme was not given a thumbs up by most MNCs. This is majorly due to the high threshold limits set in the SHR and also the continuing compliance requirement which does not give the required relief