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 from the conventional TP documentation requirements. It is therefore recommended that the SHR be amended to provide that taxpayers opting for SHR should be exempted from all the documentation requirements and should be required to maintain only basic documentation related to transactions, pricing,
etc. Further, it is recommended that the minimum threshold profit margins/prices prescribed for IT, ITeS, KPO and contract R&D firms as well as loans and guarantees be revised downwards to more realistic levels. Further clarity on categorisation of industries, i.e., ITeS v/s KPO and IT services v/s contract R&D relating to IT, is essential. These measures would act as a catalyst to rationalise and make SHR more attractive.
Furthermore, the advance pricing agreement (APA) programme, which has been quite successful in the first two years since its introduction, also needs some tweaking?in areas like enabling the formal roll back of APAs to manage historic litigation, enabling bi-lateral APAs with all countries irrespective of whether treaty enabling provisions in Article 9(2) already exist or not, SDT cover for unilateral cases, time-limits for closing unilateral cases considering there are 400 applications in the pipeline already. Increasing the resource strength in the APA infrastructure at all levels is also a burning need to ensure faster closure of the agreements which, in turn, will instil investor confidence by creating a climate of certainty and mutual respect between the taxman and taxpayers.
In a recent report, the Tax Administrative Reforms Commission, headed by Parthasarthi Shome, has suggested radical changes to the tax laws and administrative system, including curtailment of retrospective amendments and empowering tax personnel with specialised knowledge on global best practices. The taxpayers? hopes are now pinned on the upcoming budget of the newly formed government and it remains to be seen whether the government is able to bring a reasonable change to the adversarial and challenging tax regime in India and boost investor confidence.
The author is partner, Global Transfer Pricing Services, KPMG in India. Views are personal
