India is set to scrap the R15-crore threshold for referring every international transaction between an MNC’s arms for compulsory transfer pricing audit, and about to embrace a more focused approach to zero in on cross-border transactions with potential for tax evasion.
The proposed risk-based selection of transactions between MNC arms for transfer pricing audit will spare many companies the unnecessary hassle and help reduce tax litigation. Experts say the ‘risk-based’ approach is much more efficient than the monetary threshold-based scrutiny and audit. The proposal, which is under the tax department’s consideration, would be taken up by the next government as part of tax administration reforms, sources said.
At present, assessment officers refer every cross-border transaction above the threshold between associated enterprises to a transfer pricing officer, who checks whether it is on the arm’s length basis. If it is found to be a dictated price with little relation to cost or value-addition, the assessing officer recomputes the income and makes extra tax claim. Choosing cases based on the monetary threshold leads to overburdening of field officers. Sources said that every TPO in India has to do about 50 audits a year on an average compared to 5-6 that his UK counterpart does. This seriously affects the scope and depth of the audit.
The idea of selecting transactions for audit based on their risk of revenue leakage stems from India's discussions with the OECD, which is working on new transfer-pricing documentation rules and a format for country-by-country reporting of income, taxes and economic activity of MNCs.
“By having this information (country-by-country reporting), tax authorities will be able to take an informed decision on which transactions to be audited, rather than going by the quantum of the transaction,” said Rohan K Phatarphekar, head – India, Global Transfer Pricing Services, KPMG. He said that India is in support of OECD's Base Erosion and Profit Shifting (BEPS) action plan.
Selecting only those cases for audit that indicate a high risk of revenue loss would enable the department to devote more time and go deeper into minute details.
"A risk-based approach in selecting international transactions between related parties for transfer pricing audit is more efficient in checking possible shifting of profits. This helps the department in allocating precious resources to cases
that can yield maximum revenue. The risk-based approach would also help the revenue department evaluate whether the case is even worth pursuing,” said Amit Maheshwari, partner, Ashok Maheshwary &