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Transfer Pricing

This is a presentation created by our team on the new upcoming transfer pricing field. Please view and leave your comments. brainstorming is always welcome.

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Transfer Pricing

  1. 1. By : Sachin & Neha 31 Jan 2014JRA & Associates Transfer Pricing Regulations in India
  2. 2. Roadmap 31 Jan 2014JRA & Associates  Timeline  Meaning  Need of transfer pricing regulations  Overview – Indian Regulations  Meaning of relevant terms  Methods  Audit report & Documentation required  Penalties  Domestic transfer pricing  Safe harbour rules  Assessing Officer powers  Services offerings in Transfer Pricing
  3. 3. Timeline of Transfer Pricing 31 Jan 2014JRA & Associates Legislation introduced with effect from April 1, 2001 • Introduction of sections 92A to 92F in Chapter X of Finance Act 2001 & rules 10A to 10E in income tax rules 1962 Generally in line with the OECD guidelines • Finance act 2012 extends Transfer pricing provisions to SDT between related parties w.e.f 1 april 2012
  4. 4. Meaning of Transfer Pricing  Transfer prices are the prices at which an enterprise transfers physical goods & intangible property or provide services to associated enterprises of MNCs.  Approximately 60% of the total transactions across the world are between related parties.  “The presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra- group transactions has made the issue of transfer pricing a matter of serious concern. I had set up an Expert Group in November 1999 to examine the detailed structure for transfer pricing legislation. Necessary legislative changes are being made in the Finance Bill based on these recommendations.” Mr Yashwant Sinha Finance Minister February 28, 200131 Jan 2014JRA & Associates
  5. 5. Taxing authority Shifting of profits 31 Jan 2014JRA & Associates
  6. 6. 31 Jan 2014JRA & Associates Provisions Sections / Rules Computation of Income, Expenses, CCA S. 92 Associated Enterprises S. 92A Transactions subject to TPR S. 92B Specified Domestic Transaction S. 92BA Computational Provisions S. 92C(1) / Rule 10B/10C Powers of AO S. 92C Safe Harbour Rules S. 92CB Advance Pricing Arrangement S. 92CC – 92CD Documentation Requirements S. 92D / Rule 10D Audit & Transfer Pricing Report S. 92E, Rule 10E & Form 3CEB Penalties 271 (1)(c), 271AA, BA, G Definitions S. 92F/Rule 10A Overview - Indian Regulations
  7. 7. Computation of income from transaction 31 Jan 2014JRA & Associates  Section 92 provides that any 1.Income 2.Expense 3.Allocation or apportionment of cost or expense arising from any international transaction b/w two or more associated enterprises shall be computed having regard to arms length price  While determining ALP if the income works out to a figure lower than income stated in books of accounts or increase loss then not applicable
  8. 8. Associated Enterprises (Section 92A) 31 Jan 2014JRA & Associates  An enterprise would be regarded as ‘associated enterprise’ of another enterprise if 1. It participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise, or 2. The persons participating, directly or indirectly, or through one or more intermediaries, in its management or control or capital also participate in the management or control or capital of other enterprise.
  9. 9. Deemed associated enterprises 26% or more voting power Loans in excess of 51% of book value of total assets Guarantee of 10% or more of total borrowing Power to appoint More than half of board of directors Supply of 90% or more raw materials and consumables 10% or more interest in other firm , AOP or BOI 31 Jan 2014JRA & Associates
  10. 10. International transaction(Sec 92B) 31 Jan 2014JRA & Associates It means a transaction between two or more associated enterprises either or both of whom are non residents in nature of  Purchase , sale , lease of tangible or intangible property  Provision of services  Lending or borrowing of money  Any other transaction having bearing on profits , income , losses or assets of such enterprises
  11. 11. Arms length price [Sec 92F(ii)] 31 Jan 2014JRA & Associates The arm’s-length principle requires that transfer prices charged between related parties are equivalent to those that would have been charged between independent parties in the same circumstances. Sec 92B provides methods for determination of ALP If two prices possible then arithmetical mean of such prices shall be taken sec 92C(2) +/- 3% variance to arm’s length “price” permitted Case Transfer price Alp determined by applying the arithmetical mean ALP for transfer pricing adjustment 1 100 103.1 103.1 2 100 102.9 100
  12. 12. Methods ( Rule 10B) 31 Jan 2014JRA & Associates  The arm’s length price in relation to an international transaction is to be determined using the most appropriate method out of the specified methods as prescribed by the Board in Rule 10B . The five specified methods are:  Comparable Uncontrolled Price Method (‘CUP’);  Resale Price Method (‘RPM’);  Cost Plus Method (‘CPM’);  Profit Split Method (‘PSM’); and  Transactional Net Margin Method (‘TNMM’)
  13. 13. Documents Required
  14. 14.  Profile of Industry  Profile of group  Profile of related parties  Transaction terms  FAR related  Economic Analysis (method selection, comparable benchmarking)  Forecasts, budgets, estimates  Agreements  Invoices  Pricing related correspondence (letters, e-mails, fax, etc.) Entity Related Price Related Transaction Related The onus of proving SDT at ALP is on tax payer 31 Jan 2014JRA & Associates
  15. 15. 31 Jan 2014JRA & Associates Accountant’s Report (Sec 92E)
  16. 16. Section 271 –Penalty Implications Sr. No. Type of penalty Section Penalty quantified 1 a) Failure to maintain prescribed information/ documents 271AA 2% of transaction value (b) Failure to report any such transaction or (c) Furnish incorrect information 2 Failure to furnish information/ documents during assessment u/s 92D 271G 2% of transaction value 3 Adjustment to taxpayer’s income during assessment (concealed income) 271(1)(c) 100% to 300% of tax on adjustment amount 4 Failure to furnish accountant’s report u/s 92E 271BA INR 100,000 31 Jan 2014JRA & Associates
  17. 17. Powers of Assessing Officer (sec 92(3) & (4) 31 Jan 2014JRA & Associates  Determine arm’s length price in following cases : 1. Prices not in accordance with sec 92(1) & (2) 2. Documentation not in accordance with sec 92D(1) and rule 10D 3. Unreliable data or information used in computation of ALP 4. Failure to furnish documents or information within specified time under sec 92D(3)  Disallowance of deduction under section 10AA and Chapter VI-A from additional income computed Powers of Assessing Officer [Sec 92(3) & (4)]
  18. 18. Domestic Transfer Pricing 31 Jan 2014JRA & Associates
  19. 19. SDT – Intent of the Law 31 Jan 2014
  20. 20. Section 92BA – Meaning of SDT (inserted by Finance Act, 2012 w.e.f. AY 2013-14 i.e. current FY) For the purposes of this section and sections 92, 92C, 92D and 92E, “specified domestic transaction” in case of an assessee means any of the following transactions, not being an international transaction, namely:- (i) any expenditure in respect of which payment has been made or is to be made to a person referred to in section 40A(2)(b); (ii) any transaction referred to in section 80A; (iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA; (iv) any business transacted between the assessee and other person as referred to in section 80- IA (10); (v) any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of five crore rupees. 31 Jan 2014JRA & Associates
  21. 21. SDT Inter unit transfer of goods & services by undertakings to which profit-linked deductions apply Expenditure incurred between related parties defined under section 40A Transactions between undertakings, to which profit-linked deductions apply, having close connection Any other transaction that may be specified Overview of Provisions of Sec. 92BA 31 Jan 2014JRA & Associates
  22. 22. FMV ALP No method prescribed for computing FMV Six methods prescribed for computing ALP No documentation required to be maintained Contemporaneous documentation required to be maintained Other than reporting in tax audit report, no statutory compliance Accountant’s report signed by a CA to be filed Assessment done by the AO Assessment done by the TPO Implication Post Budget 2012 for SDT 31 Jan 2014JRA & Associates
  23. 23. Intent of Indian TP Regulations (International transactions) Indian Co. Associated Enterprise (AE Co.) Shifting of Profits Shifting of Losses India Overseas Tax @ 32.45% Tax @ lower rate approx 10% Tax Saving for the Group – Loss to Indian revenue 31 Jan 2014JRA & Associates
  24. 24. Intent of Indian TP Regulations (Domestic transactions) Particulars (Ordinary Situation) Co. X (SEZ) Co. Y (DTA) Income 500 1000 Income from related party 100 - Expenses 300 800 Expense to related party - 100 Profit/ Loss 300 100 Tax rate applicable 0% 32.45% Tax - 32.45 (100*32.45%) Particulars (Planned Situation) Co. X (SEZ) Co. Y (DTA) Income 500 1000 Income from related party 200 - Expenses 300 800 Expense to related party - 200 Profit/ Loss 400 - Tax rate applicable 0% 32.45% Tax - - Loss to Revenue – Tax Saving to the Group 31 Jan 2014JRA & Associates
  25. 25. Intent of Indian TP Regulations (Domestic transactions) Indian Co. Tax Holiday undertaking Related Enterprise in Domestic Tariff Area (DTA) Shifting of expenses/losses Shifting of income/profits India Tax Exemption Tax Saving for the Group – Loss to Indian revenue India Tax @32.45% 31 Jan 2014JRA & Associates
  26. 26. Particulars (Ordinary Situation) Co. X (DTA) Co. Y (DTA) Income 500 1000 Income from related party 100 - Expenses 700 800 Expense to related party - 100 Profit/ Loss (100) 100 Tax rate applicable 32.45% 32.45% Tax - 32.45 (100*32.45%) Particulars (Planned Situation) Co. X (DTA) Co. Y (DTA) Income 500 1000 Income from related party 150 - Expenses 700 800 Expense to related party - 150 Profit/ Loss (50) 50 Tax rate applicable 32.45% 32.45% Tax - 16.23 (50*32.45%) Present Loss to Revenue* – Tax Saving to the Group * By shifting of income from a profit making company to a loss making company, the group could reduce its tax liability by 16.23 for the current year, though the impact will be reversed in future years given carry forward of losses. Intent of TP Regulations (Domestic transactions)
  27. 27. 31 Jan 2014JRA & Associates A Step towards ensuring certainity & reducing litigation in transfer pricing. CBDT has issued draft SHR on 14th August’2013, inviting public comments. On 18th September’2013, the Ministry of Finance issued a press release stating SHR has been finalised. Concept of Safe Harbour Rules. Certainity in the unceratin world of transfer pricing. Reduced Litigation – A big YES Safe Harbour Rules
  28. 28. Financial year in which demand raised No. of TP audits completed No. of adjustment cases % of adjustment cases Amount of Adjustment(rs.cr s) 2004-05 1061 239 23% 1220 2005-06 1501 337 22% 2287 2006-07 1768 471 27% 3432 2007-08 218 84 39% 1614 2008-09 1726 670 39% 6140 2009-10 1830 813 44% 10908 2010-11 2301 1138 49% 23237 2011-12 2638 1343 51% 44531 2012-13 3200 1600 50% 70016 Total 16243 6695 41% 163385 Table indicating increasing transfer pricing adjustments: 31 Jan 2014JRA & Associates
  29. 29. 31 Jan 2014JRA & Associates Eligible International Transaction Safe Harbour ratios Software development services (IT services) and Information Technology Enabled services (ITES), with insignificant risks Operating profit margin to operating Expense • where the aggregate value of such transactions < INR 500 crores ≥ 20 percent • where the aggregate value of such transactions > INR 500 crores ≥ 22 percent. Knowledge processes outsourcing services (KPO services), with insignificant risks Operating profit margin to operating expense ≥ 25 Percent Safe Harbour for various sectors
  30. 30. 31 Jan 2014JRA & Associates Eligible International Transaction Safe Harbour ratios Intra-group loan to wholly owned subsidiary (WOS) where the amount of loan: Interest rate equal to or greater than the base rate of State Bank of India (SBI) as on 30th June of the relevant previous year: • < INR 50 crores • plus 150 basis points • > INR 50 crores • plus 300 basis points Explicit corporate guarantee to WOS where the amount guaranteed Commission or Fee of • < INR 100 crores 2 % or more Per annum •> INR 100 crores, and the credit rating of the borrower, by a Securities and Exchange Board of India (SEBI) registered agency is of the adequate to highest safety. 1.75 % or more Per annum
  31. 31. 31 Jan 2014JRA & Associates Eligible International Transaction Safe Harbour ratios Specified contract research and development services (Contract R&D services), with insignificant risks, wholly or partly relating to software development Operating profit margin to operating expense ≥ 30 Percent Contract R&D services, with insignificant risks, wholly or partly relating to generic pharmaceutical drugs Operating profit margin to operating expense ≥ 29 Percent Manufacture and export of: • core auto components • non-core auto components where 90% or more of total turnover relates to Original Equipment Manufacturer sales Operating profit margin to operating expense: • ≥ 12 percent • ≥ 8.5 percent
  32. 32. 31 Jan 2014JRA & Associates  TP Documentation  Transfer Pricing Planning and Supply Chain Structuring  Transfer Pricing Controversy Management  Mutual Agreement Procedure / Advance Pricing Arrangement  Transfer Pricing Valuation Service  Filling of form 3CEFA for application for opting for SHR.  Establishment of criteria for effecting SHRs. Service offerings in Transfer Pricing
  • abelfelizio

    Aug. 27, 2015
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    Nov. 9, 2014

This is a presentation created by our team on the new upcoming transfer pricing field. Please view and leave your comments. brainstorming is always welcome.

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