In what reflects India’s aggression in tax audits involving multinational corporations (MNCs), the revenue department in its 2011-12 audit has claimed income suppression of R44,532 crore ($8billion) pertaining to transfer pricing, up 85% over the comparable figure in the previous year’s audit. Companies have been asked to pay nearly a third of this amount called ‘transfer pricing adjustment’ as tax, according to finance ministry sources.
The sharp increase in these tax claims comes at a time when observers say the increasing tax scrutiny in Asian economies is slowing the pace at which multinationals expand their business in the continent. “Over half (53%) of multinationals in Asia believe their expansion plans have been curbed by overzealous tax authorities,” said a survey based on interviews of CFOs done by tax consultancy firm Taxand.
The government intensely scrutinises the price at which the Indian arm of a global firm trades in goods or services with its parent – called the transfer price – in order to prevent companies from showing lesser taxable income here by way of underpricing of goods or services sold or overpricing of purchases. The idea is to prevent shipping of profits to a low-tax country.
The tax claim made last fiscal pertains to assessment year 2008-09 as transfer pricing audit typically happens with a lag of about 30 months. In 2010-11, the Income Tax Department had held that the taxable income of Indian units of MNCs was Rs 24,111 crore ($4.3 billion) more than what companies had declared as their income. That assessment, of course, led to higher tax liabilities and ended up in income-tax tribunals.
Figures also show that Indian tax authorities are using all their wits to ensure that most of the audited cross-border transactions between MNCs and local arms result in a price adjustment and tax claim. In fact, in the 2011-12 audit, every other transaction examined led to a tax claim, a far cry from the situation five years ago, when only one in four had led to a transfer price adjustment and tax notice.
Rahul K Mitra, PwC’s national leader, transfer pricing, believes a combination of reasons has led to this escalation in transfer pricing disputes.
“The unique method India uses for arriving at the arm's length price of a transaction, aggressive enforcement of transfer pricing rules by the authorities and the lack of proper documentation and homework by companies have led to the sharp increase in transfer pricing disputes,”