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Budget 2014 proposals – India transfer pricing regulations aligned to international norms

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It is indeed heartening to note that the focus of the new government is to reduce litigation on transfer pricing. The Finance Minister highlighted in his speech that the overall tax demand of more than INR4 lakh crore (approximately 66USD billion) is under dispute and litigation. It is understood that roughly 50 per cent of this relates to transfer pricing disputes.

Accordingly, transfer pricing ‘certainty’ is key to taxpayers. With this backdrop and objective, the Finance Minister has proposed certain amendments in the transfer pricing regulations.

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Budget 2014 proposals – India transfer pricing regulations aligned to international norms

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG in INDIA Budget 2014 proposals – India transfer pricing regulations aligned to international norms 10 July 2014 22 21 February 2013 Background It is indeed heartening to note that the focus of the new government is to reduce litigation on transfer pricing (TP). The Finance Minister highlighted in his speech that the overall tax demand of more than INR 4 lakh crore (approximately 66 USD billion) is under dispute and litigation. It is understood that roughly 50 per cent of this relates to transfer pricing disputes. Accordingly, transfer pricing ‘certainty’ is key to taxpayers. With this backdrop and objective, the Finance Minister has proposed the following amendments in the transfer pricing regulations: 1. APA Roll back provisions Roll back provisions have been introduced in the Advance Pricing Agreement (APA) program, and further strengthening of the APA administrative set- up has been proposed. The concept of ‘rollback’ in the context of APA means application of negotiated position under an executed APA could be applied to the prior years, provided the facts and circumstances of the international transactions are similar.  With effect from 1 October 2014, it is proposed to provide roll back mechanism in the APA programme. It is proposed that an APA in respect of an international transaction may, subject to such prescribed conditions, apply during any period, not exceeding four previous years preceding the first previous year for which the APA is applied.  It is also proposed to strengthen the tax administrative set-up for quick disposal of APA applications. 2. Documentation penalty With effect from 1 October 2014 it is proposed that the authority to levy penalty, of two percent of the value of international transactions or specified domestic transactions for failure to furnish information, or documentation under Section 92D (3) of the Income Tax Act 1961 (the Act), should be extended to the Transfer Pricing Officer (TPO) too, in addition to the Assessing Officer and the Commissioner (Appeals). Essentially, this has been introduced to ensure that taxpayers submit their transfer pricing documentation within the statutory timeline when called for by the TPOs.
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3. Introduction of range concept  The Finance Minister has proposed to introduce the concept of price/margin range for determination of ALP, in the Income Tax Rules, 1962 (the Rules), to align the Indian TP Regulations with leading international practices. However, it has also been clarified that the existing concept of arithmetic mean would continue to apply where number of available comparables is inadequate.  The relevant data is under analysis and appropriate rules will be prescribed accordingly. 4. Allowability of multiple year data for benchmarking  The TPOs have been carrying out transfer pricing audits and adjusting the transfer price based on single year data, as per the existing TP regulations. It is now proposed that multiple year data will be allowed to be used for comparability analysis.  Necessary legislative amendments are expected subsequently in this regard. This proposal is again aligned to international practices of conducting comparability analysis. 5. Deeming TP provisions Deeming TP provisions are proposed to be applied to transactions between an enterprise and an independent person irrespective of whether such persons are non- resident or not.  The deeming TP provisions contained in Section 92B(2) of the Act, are now proposed to be applied to transactions between an enterprise and an independent person where there is a prior arrangement between such independent person and associated enterprise, irrespective of whether such independent person is a non-resident or resident. This amendment shall take effect from 1 April 2015.  As per the earlier deeming provisions, deemed international transaction could be interpreted to exist only if the independent person was a non-resident. However, with this proposed amendment, transactions with such independent resident person will also get covered under the TP regulations. Our comments The proposed APA roll back provisions are expected to provide much awaited relief for the taxpayers and have been introduced with a view to stem the tide of rising litigation in transfer pricing. The government has expressed its readiness in reducing large scale litigation which is currently pending or may only rise in the coming future. Even then, it is yet to be seen what other conditions are being prescribed for the APA roll back mechanism to apply. The changes to strengthen the tax administrative set- up for quick disposal of APA applications are also steps in the right direction, and reiterates the government’s commitment to the continued success of the APA programme. With respect to the amendment relating to Section 92B(2), the proposed amendment now effectively includes domestic transactions with third parties in India as ‘international transactions’. This will require some taxpayers to relook at their domestic arrangements which are effected at the behest of their overseas associated enterprises. The amendments regarding use of multiple year data and introduction of the range concept for determining ALP seem to have been introduced to put to rest some of the most contentious and much litigated TP cases, as well as align the regulations to leading international practices. There are of course various areas of litigation in TP, but the tone and the approach of the new government in this budget focussed on rationalising TP regulations, providing certainty and reducing litigation is expected to improve the confidence in doing business in India for both taxpayers as well as investors, and could prove to be a game changer and a win-win possibility for the government as well.
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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