RECENT DEVELOPMENTS IN INTERNATIONAL AND …...Transfer Pricing Amendments –Finance Bill 2014 Introduction of Rollback mechanism in Advance Pricing Agreements Strengthening the administrative

RECENT DEVELOPMENTS IN INTERNATIONAL AND DOMESTIC

TRANSFER PRICING

CA .T. P. OSTWAL

1November 2014 T P Ostwal & Associates

1

8 Key Issues and Challenges in Domestic Transfer Pricing

7

Safe harbour provisions

6

New powers to the TPO

Recent Trends

Recent

developments in

Transfer Pricing

5

APA & Roll back

2

Key Issues in International Transfer Pricing

3

Deemed International transactions

4

Multiple year data and range concept

2T P Ostwal & Associates

Transfer Pricing Amendments – Finance Bill 2014

Introduction of Rollback mechanism in Advance Pricing Agreements

Strengthening the administrative set up of APA to expedite processing of

applications

Introduction of Range Concept

Allowability of Use of Multiple Year for Benchmarking

Changes to the definition of the term deemed international transaction u/s

92B

Empowering TPO to levy penalties

Determination of arm‘s length price (ALP) when more than one price is

determined by most appropriate method from April 1, 2015


Emerging international tax issues and effect

on tax policies

Increasing concern for both among developed and developing

countries on ‗base erosion and profit shifting‘, double non-taxation

Impact of BEPS report and other changes on existing structures and

proposed commercial transactions

Developed countries too now looking at source based taxation due to

Economic downturn,

Net technology importer,

FATCA imposition of withholding taxes on US source investment

income


Emerging international tax issues and effect

on tax policies

Concern on Treaty abuse mounting

Changing economic scenario should force Government to

contemplate policy shift

International taxation and TP controversies today are more than

necessary to assure reasonable allocation of taxing jurisdiction

among all countries to facilitate global job creation and economic

growth


Recent trends


Transfer Pricing - Recent Trends

India contributes

TP additions to more of USD 41 than 70% of billion approx the TP

Separate tribunal for TP disputes still under consideration

TP Week ranked India #1 on Top 10 Toughest Tax Authorities for TP

APA Programme Final Safe introduced* harbour

rules notified**

global disputes 80000

70000

* Introduced with effect from 60000 July 1, 2012, detailed rules prescribed 50000 on August 31, 2012 and guidance on 40000 APA with FAQs issued on April 2013 30000

20000 ** Draft rules introduced on August 14, 2013

TP Adjustment (in INR crores)

70000

44531 60000

23237

10908

inviting public comments and Final rules introduced on September 18, 2013

10000 3432 6140 1220 2287

0


Key Challenges


Key Challenges 1

8

7

Loan and Guarantee Fee

IT / ITES Margins

Arithmetic Mean

Undervaluation of shares

2 Marketing intangibles

Key

Issues Royalty

Pay-outs 3

6 Single Managementyear data Charges

4


T P Ostwal & Associates 10

THE VODAFONE SAGA – PART III - SHARE VALUATIONBombay High Court Rules in Favour of Vodafone India in $490 Million Tax Dispute

Facts

• Vodafone India, a wholly owned subsidiary of Mauritian entity Vodafone Tele-Services

(India) Holdings Limited (Vodafone Mauritius), issued 289,224 equity shares of the face

value of INR 10 (USD 0.16) each at a premium of INR 8591 (USD 140.7) per share in

August 2008 to Vodafone Mauritius.

• The Indian tax authorities sought to tax this transaction by Vodafone India by applying

the transfer pricing (TP) regulations.

• The primary ground was that Vodafone Mauritius subscribed to shares of Vodafone

India at prices lower than the market price or fair price.

Issue

• whether share issuance leads to income for the issuer; and

• if carried out between associated enterprises, should it attract the TP

regulations?

November 2014 T P Ostwal & Associates 11

THE VODAFONE SAGA – PART III - SHARE VALUATION

RULING OF BOMBAY HIGH COURT• The Bombay High Court answered both these questions in the negative.

• The judgment clarifies that share issuance of the nature described above does not give rise to any income, and hence, there can be no question of applying the TP regulations.

• The vexed question of applying TP principles to share issuance has been laid to rest, and it can be anticipated that another 25 odd cases that are being litigated on a similar point before the courts will come to a near identical conclusion.

November 2014 T P Ostwal & Associates 12

THE VODAFONE SAGA – PART III - SHARE VALUATIONThe Road Map Ahead for Foreign Investors• Internationally, funding a subsidiary by issuing shares is a common practice among

multinational companies and is typically viewed as a capital transaction and out of the TP net.

• The verdict in this case has reaffirmed this aspect in the Indian context.

• The mode of re-characterization employed by the tax authorities is neither provided for under

exact provisions of Indian tax law nor can it conceivably arise directly from the issue of

shares. Again, the clarity in this verdict is likely to be viewed as a welcome step.

• Foreign investors who were in watch mode before infusing further equity into their Indian

operations can take comfort from the fact that some clarity has been attained.

• However, it is important to note that consequent to an amendment to the income tax law—with

effect from 1 April 2013—the portion of consideration received for the issue of shares of a

public unlisted company or private company to an Indian resident that is in excess of the fair

market value of those shares, will be subject to tax in the hands of the companies under the

head "income from other sources.―

SECONDARY AND CORRELATIVE ADJUSTMENTS AND DOMESTIC LEGISLATION

Indian Holding Co.

Foreign Wholly Owned

Subsidiary

Outside India

Subscription of shares of Foreign Co.

• SECONDARY ADJUSTMENT – INDIAN EXPERIENCE

• Indian parent company infuses share capital in the Foreignsubsidiary (at premium or at face value per share in case ofnegative networth of subsidiary)

• The Revenue takes a position that the shares have been issued tothe Indian Company at an overvalued price/more than the fairmarket value of the shares;

• The difference between the actual issue price and the ALPcomputed by the department is characterized as:

• Deemed Loan by the Indian Parent - treated as TP adjustment

• Notional Interest on deemed loan- treated as TP adjustment

• India does not have an express or specific legislation for inflicting the “secondary adjustments”

currently in vogue. However, in practice, authorities have been resorting to “secondary

adjustments” in India.

Deemed International transactions


Erstwhile Provisions

Section 92B(1)

―For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction”

means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of….

Section 92B(2)

―A transaction entered into by an enterprise with a person other than an associated enterprise shall,

for the purposes of sub-section (1), be deemed to be a transaction entered into between two

associated enterprises, if there exists a prior agreement in relation to the relevant transaction

between such other person and the associated enterprise, or the terms of the relevant transaction are

determined in substance between such other person and the associated enterprise”

Third party T1 AE

Overseas

India

T2

Taxpayer

8 15T P Ostwal & Associates

Facts of the Swarnandhra Case

• IJM India (―IJMII‖) entered into a joint venture with Andhra

Pradesh Housing Board (―AP-HB‖) and formed Swarnandhra IJMII Integrated Township Development Company (―Swarn‖)

• IJMII rendered project management services to Swarn

pursuant to an agreement between IJM AE and Swarn

• T1 Payment to IJMII (construction contractor)

• Swarn entered into transactions with IJMII TPO applied

Section 92B(2); as per TPO, terms determined in substance

between the Swarn and the AE

Question before the Tribunal:

Whether transaction between IJM India and Swarn fall within the purview of Section 92B(2)

Agreement entered into for project management services to be rendered by IJMII

AP-HB

49%

IJM - AE

Overseas

India

IJMII

51% T1

Swarn Question of interposing independent third parties between two AEs to avoid transfer pricing applicability

16

Key findings of Hyderabad ITAT

Swarn case:

• Though Section 92B(2) is a part of section 92B it is to be read as an extension of Section 92A(2) of the Act and not

as an extension of Section 92B(1).

• For Section 92B(2) to apply, Section 92B(1) should first be attracted in this case Section 92B(2) cannot be

applied/ attracted

• Domestic companies As both the parties are residents, the transaction between the Swarn and IJMII do

not constitute an international transaction. The basic premise for invoking section 92B(2) does not arise.

• IJMII was the actual provider of services to Swarn it was not a company interposed between AE &

Swarn to circumvent the TP provisions.

• Influence - In view of the active participation of the government in the functioning of the Swarn, it cannot be

said that the AE would influence the entering into the contract by the taxpayer or its terms and conditions.

• Section 92B(2) is transaction specific and does not apply to all transactions between the enterprise and the

unrelated person.

• Legislative intent - Identify transactions wherein intermediary is used to break a transaction in order to

circumvent TP provisions i.e. substance over legal form

Section 92B(2) not triggered


Facts of the Kodak Case

• T1 Sale of ‗Medical Imaging segment‘, global

basis vide Global Agreement between Kodak

US and Carestream Inc

• T2 Pursuant to T1, Kodak India sells India

business (segment) vide Agreement between

Kodak India and Carestream India

• TPO invoked Section 92B(2) of the Act on the

premise that India sale pursuant/ consequential to a larger sale transaction

Question before the Tribunal:

Whether the sale of Indian business by Kodak India to Carestram India is a deemed international transaction ?

T1

Kodak US

97.7%

Kodak India T2

Carestream

Inc

99.9% USA

INDIA

Carestream

India


Key findings of Mumbai ITAT

Kodak case:

• Language of Section 92B(2) ―for the purposes of sub section (1)” i.e. either party has to be a non-resident

(a strict interpretation is needed)

• Domestic companies individual and independent; no transaction involving a non-resident company

• No relationship established i.e. no connect has been established for the relevant transaction (Sale of India

business) between Kodak India and Care Inc. or between Care India and Kodak US

Kodak US Carestream Inc

Kodak India Carestream India

• the preconditions are:

- the existence of a prior agreement between the other entity and the AE in relation to the relevant

transaction, or

- there should be AE involvement in determining (in substance) the terms of the transaction.



Kodak case:

• In this regard, the following important submissions made by the taxpayer are relevant:

- Terms and conditions of the sale were determined solely by the taxpayer and Carestream India and not by

Kodak US;

- Valuation of the business was undertaken by the taxpayer through its independent valuers;

- The taxpayer received entire sale proceeds, and nothing was transferred to Kodak US;

- There was no prior agreement between Carestream India and Kodak US for this sale transaction [as

required by section 92B(2) of the Act].

• Though, India agreement is a consequence of global agreement but this agreement did not have any role in/

effect on sales transaction.

• Matter cannot be restored to TPO for ALP determination if TPO in the first instance has ignored mandatory

provisions of law.


Key findings of Mumbai ITAT


Impact of the amendment to Section 92B(2)

Impact of participation of another entity/ shareholder,

Terms to be determined in substance ,

The current Section 92B(2) provides that transaction

by an enterprise with an unrelated party shall be

deemed to be a ―transaction‖ between two associated

enterprises if there exist a prior agreement between

the unrelated party and Associated Enterprise of the

enterprise or where terms of relevant transaction are

determined in substance between the unrelated party

and AE.

The ambiguity in the current section was whether or

not the unrelated party has to be a non-resident for the

transaction to be deemed international transaction

Even though prior agreement , must have influence or effect ,

Document critical - showing no influence

The Finance Bill 2014 has amended section 92B(2) to state that the residential status of the unrelated party is immaterial for determination of deemed international transaction

From April 2015


Multiple year data & Range


Multiple year and Inter quartile range Proposed legislation

Current legislation

Restricted use of multiple year data #

The revenue authorities insisted on use of data of the single year to which the transaction pertain s to.

Arithmetic mean (as

against universal standard of inter quartile range)

considered as a measure of central tendency for computing arm’s length

price of international

transactions

# Proviso to rule 10B(4)

Finance Minister proposed to amend

provisions to allowuse of multiple year

data and range

concept to align with international best practices

Multiple year*

"Provided also that where more

than one price is determined by

the most appropriate method,

the arm's length price in relation to an international

transaction or specified

domestic transaction undertaken on or after the 1st

day of April, 2014, shall be

computed in such manner as

may be prescribed and

accordingly the first and second

proviso shall not apply."

Interquartile range

Current arithmetic mean concept to continue where number of comparables is inadequate

* Section 92C - third proviso to sub-section (2) w.e.f April 2015 23T P Ostwal & Associates

Multiple year data

• ‗Use of single year data‘ has contributed to significant amount of litigation in India.

• Multiple year data - factors business cycle impact, provides better comparability results

• Global best practices on use of multiple year data

Country Use of Multiple year data

Australia 3 out of 5 years

China 2 out of 3 years

U K 3 out of 5 years

U S 2 out of 3 years





The existing provisions of section 271G of the Act provide that if any person who hasentered into an international transaction or SDT fails to furnish any information/document as prescribed by the transfer pricing provisions, then such person shall beliable to a penalty up to 2% of the value of international transactions (or SDT) whichmay be levied by the AO or the CIT(A)

“In section 271G of the Act, after the words “theAssessing officer”, the words, figures and letters “or theTransfer Pricing Officer as referred to in section 92CAshall be inserted with effect from the 1st day of October,2014.”

Power to levy penalty


APA - Rollback provisions


APA - Roll back provisions

APA Procedure

APA

An APA is an agreement between the taxpayer and the tax authority on the pricing of future intercompany

transactions.

The taxpayer and tax

APAs are presently available for a period not exceeding five years, starting from April 1, 2013.

01

authority mutually agree

on the transfer

pricing methodology

(‗TPM‘) to be applied and

its application for a certain

future period of time for covered

transactions

APA Rollback Procedure

The amendment to Section 92CC w.e.f October 1, 2014

will allow an APA entered into to be applied to four previous

years for the transactions covered in the APA.*

02 * Subject to such conditions, procedure and manner as may be prescribed, provide for determining the arm‘s length price

or specify the manner in which arm‘s length price shall be determined in relation to the international transactions


Global Perspective / Indian APA Scenario

Roll back Provisions

Country Roll Back Provision

May conduct a risk assessment of

Indian APA Scenario

• Pre-filing meeting without filing fees (also

on anonymous basis)

Australia past years to provide for roll back

• APA Applications conversion of

unilateral to bilateral & vice versa possible

China Upto 10 years • Approximately 150 applications filed in year

1 and 240 in year 2

Japan

Singapore

U K

U S

Upto 3 years

Upto 2 years

May be considered

May be considered

• Site visits by APA team had been completed

in most cases

• 5 Unilateral APAs signed on March 31, 2014

APA team is positive & pragmatic and

relates to business/ practical realities

• Past litigation would not automatically

impact favourable APA resolution


Safe harbour provisions


Snapshot of Indian Safe Harbour Rules Nature of transaction Quantum of International Safe Harbour Margin

transaction

Software development

services / ITeS

Less than INR 5 Billion

Exceeding INR 5 Billion

20%

22%

KPO No range 25%

No range 30% (software)Contract R&D services

No range 29% (generic pharma)

Intra - Group Loan to Less than INR 500 Million SBI Base rate + 1.50%

wholly owned subsidiaries Exceeding INR 500 Million SBI Base rate + 3.00%

Corporate Guarantee to Less than INR 1 Billion 2% pa

wholly owned subsidiaries Exceeding INR 1 Billion* 1.75% pa

Manufacture and export of

auto components

No Range

No Range

12% (core)

8.50% (non-core)

* credit rating of ―Adequate to highest safety‖ from agency registered with SEBI


Safe Harbor India - Services

The description of an eligible taxpayer with insignificant risk is in line with criteria prescribed in a recently issued Circular (No. 6/2013 dated 29 June, 2013)

Foreign Principal Indian Service Provider (ICo)

Economically significant functions ICo is largely involved in economically

(Conceptualisation, Design, etc.) insignificant functions

Funds/capital and other economically ICo does not use any other economically

significant assets including intangibles significant assets including intangibles

Capability to control or supervise through its ICo works under direct supervision of foreign

strategic decisions to perform core functions as principal

well as monitor activities

Assumption of risks ICo does not assume or has no economically

significant realised risks

Ownership right (legal or economic) on outcomeICo has no ownership right on outcome of

of research research which shall also be evident from conduct

of the parties


Financial Transactions

#

1.

Eligible International Transaction

Loans provided by Indian companies to their wholly owned subsidiaries

Proposed Safe Harbour

The Interest rate is equal to or greater than the base rate of State Bank of India as on 30th June * of the relevant previous year plus:

•150 basis points in case the loan does not exceed INR 500 Million (USD 8.5 Million approx)

•300 basis points in case loan exceeds INR 500 Million ((USD 8.5 Million approx)

The commission or fee is 2.00% or more per annum if the amount

2.

Provision of corporate guarantees by Indian companies to their wholly owned subsidiaries

guaranteed is less than INR 1 Billion (USD 17 Million)

The commission or fee is 1.75% or more per annum if the amount guaranteed exceeds INR 1 Billion (USD 17 Million) subject to the credit rating of the AE, done by an agency registered with the SEBI, is of the adequate to highest safety

•Base rate for FY 2012-13 - 10.00% p.a •Base rate for FY 2013-14 - 9.70% p.a


Procedural aspects

• Applicable for Financial Years 2012-13 and subsequent four years

• Documentation as per Section 92D of the Act and Accountant‘s Report in Form 3CEB as

per Section 92E of the Act to continue, despite adoption of Safe Harbour rules

• The Safe Harbour rules are voluntary; in case the same are not opted for, the

determination of arm‘s length price to be made without having regard to the Safe

Harbour rules

• Time bound verification of eligibility and redressal forum. No penalties

• The Assessing Officer shall declare the option exercised by the tax payer to be invalid if

taxpayer does not furnish adequate information or the requirement prescribed under

the rules are not satisfied

• No Safe Harbour for International transactions with no tax or low-tax jurisdictions

(countries with maximum marginal tax rate less than 15%) and notified areas as

provided under section 94A of the Act

• A taxpayer opting for Safe Harbour rules would not be entitled to invoke Mutual

Agreement Procedure


Safe harbour rules around the world

Country Transaction Arms Length Safe Harbour

Non-core services (i.e., where revenues / expenses

Australia from such services do not exceed 15% of the Generally, a 7.5% mark-up on cost accepted

Company's total revenues / expenses)

Routine services such as payroll compilation,

USA Routine intra-group services processing workers compensation, posting payments etc., charged at cost (without mark-up) are considered at arm‘s length

Low value services such as accounting, tax or legal Japan Low value intra-group services services, debt collection etc., charged at cost (without

mark-up) are considered at arm‘s length

Import of goods, services and rights 20% gross profit for resale transactions, 60% grossprofit for manufacturing

Brazil

Exports

Export price to be higher or equal to 90% of the average price in Brazilian market for same or similar products sold to unrelated parties by the entity or other companies

Routine intra-group services ( where similar

Singapore services are not provided to unrelated third 5% mark-up on cost accepted

parties)

Non-core services under a NZD 100,000 de

New

Zealand

minimis threshold. Non-core activity is defined as

an activity that is not integral to profit earning or 7.5% mark-up on cost accepted

economically significant activities 35T P Ostwal & Associates

Points to Ponder

• High margins for becoming popular dispute resolution route; however given the low

cost base (for many small/ mid sized companies), Safe Harbour may still be worth

evaluating to address the administrative burdens and achieving certainty, particularly

for captive IT & ITeS companies

• While the Safe Harbour rules are optional, one will have to wait and watch the influence

it has on the conduct and decision making of tax authorities

• Impact in case of overlapping services to be evaluated before hand

• These rules does not cover Domestic Transactions (i.e. Domestic Transfer Pricing)

• Neither the comparability adjustments are permitted, nor the benefit of tolerance band

(+/- 3 % or 1%) is made available

• Given the high margins proposed under Safe Harbour, MNCs may consider APAs,

preferably bilateral.


DOMESTIC TRANSFER PRICING

ISSUES AND CHALLENGES


Introduction• TP was earlier limited to ‗International Transactions‘

• The Finance Act 2012, extends the scope of TP provision to ‗Specified DomesticTransactions‘ between related parties w.e.f. 1 April 2012

• The SC in the case of CIT vs Glaxo Smithkline Asia Pvt Ltd [2010-195Taxman 35 (SC)]recommended introduction of domestic TP provisions

• SDT previously reported/certified but onus on revenue authorities

• Obligation now on taxpayer to report/ document and substantiate the arm‘s length nature ofsuch transactions

• Shift from generic FMV concept to focused ALP concept

• These new provisions would have ramifications across industries which benefit from the saidpreferential tax policies such as SEZ units, infrastructure developers or operators, telecomservices, industrial park developers, power generation or transmission etc. Apart from this,business conglomerates having significant intra-group dealing would be largely impacted.

• Practice exists in USA ,CANADA,GERMANY AND UK AS WELL


Section 92BA – Meaning of SDT(inserted by Finance Act, 2012 w.e.f. AY 2013-14)

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 transaction, referred to in any other section under Chapter VIA or section 10AA, to which provisions

of section 80-IA(8) or section 80-IA(10) are applicable; or

(vi) 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.39November 2014 T P Ostwal & Associates

Benchmarking SDTs

Determination of Arm's Length Price – the approach

Identification of SDTs

Function, assets and risk analysis

Selection of most appropriate

method

Economic analysis

Calculation of Arm’s Length

Price

Arm's length price determination – a methodical exercise based on

meticulous collation and analysis of data40November 2014 T P Ostwal & Associates

Points for Consideration Whether the threshold limit of Rs. 5 crore applies to the aggregate amount under all the relevant sections

taken together OR under each section separately i.e. 40A(2), 80A, 80-IA(8), 80-IA(10), 10AA etc. ?

Whether payment for capital expenditure Or expenditure capitalized is also covered ?

Whether the provisions will apply in case the payer‘s income is chargeable to tax under the head ‗Income

from other sources‘, because section 58(2) says –The provisions of section 40A shall, so far as may be,

apply in computing the income chargeable under the head ―Income from other sources‖ as they apply in

computing the income chargeable under the head ―Profits and gains of business or profession‖ ?

Whether new provision applies to -

Public Charitable Trust paying remuneration to related persons.

Co-operative Societies

Social Clubs

having a business undertaking

Transfer pricing provisions are not applicable in case where income is not chargeable to tax at all.

Correlative adjustments - if excessive or unreasonable expenses are disallowed in the hands of tax payer at time of

the assessment then corresponding adjustment to the income of the recipient will not be allowed in the hands of

recipient of income. Hence, it would lead to double taxation in India.41November 2014 T P Ostwal & Associates

Challenges

42

Type of payments/ transactions Challenges• Salary and Bonuses paid to the

partners

• Remuneration paid to the Directors

• Transfer of land

• Joint Development agreements

• Project management fees

• Benchmarking?• Whether the limit as mentioned in section 40 (b) would be the ALP?

• Benchmarking?• Whether the limit as mentioned in Schedule XIII would be the ALP?

• Whether the rates mentioned in the ready reckoner be considered as ALP?

• Benchmarking?

• Benchmarking?

November 2014 T P Ostwal & Associates

Challenges

43

Type of payments/ transactions Challenges• Allocation of expenses between the

same taxpayer having an eligible unit and non-eligible unit

• Definition of Related Party

• Concept of ‘close connection’ or ‘any other reason’ - Invoking section 80IA(10)

• Whether these allocation would be SDT – Sec 80-IA(10)? • Directly v/s Indirectly

• Whether Assessing Officer can recompute the profits eligible for tax holiday if tax payer has business with another party of “close connection” earns more than ordinary profits because of such “close connection” or “any other reason” ?

November 2014 T P Ostwal & Associates

Key Takeaways – Domestic Transfer Pricing

• Close tracking of covered transactions

• Maintain relevant and robust documentation

• Claims made need to be justified – all invoices, relevant documentation

should be maintained

• Benefit test is a must

• Economic rationale of each transaction needs to be substantiated and

documented


Going Forward - Domestic Transfer Pricing

To Identify and map the relationship between domestic related parties specified u/s

40A(2)(b)

Identify and map the SDT

Revisit the pricing mechanism applied by the company for SDT applying the most

appropriate prescribed methods

To implement TP regulations in FY 2011-12 itself although not statutorily required so that

systems can be improved for FY 2012-13. To note that variations in profits of tax holiday

units for FY 2013 compared to FY 2012 may raise concerns from tax officers.

Availability of APA

The onus of proving SDT at ALP is on the tax payer


WAY FORWARD

34 46November 2014 T P Ostwal & Associates

2) Hybrid mismatch arrangements

12) Require taxpayers to disclose their aggressive tax planning arrangements

1) Digital Economy 11) Establish methodologies to collect and analyze data on BEPS and the

actions to address it

3) Strengthen CFC rules8, 9 and 10: Assure that transfer pricing outcomes are in line with

value creation

8. Intangibles9. Risks and capital

10. Other high-risk transactions

5) Counter harmful tax practicesmore effectively, taking into accounttransparency and substance

13) Re-examine transfer pricing documentation

OECD & UN BEPS : Key areas of Concern

4) Limit base erosion via interestdeductions and other financialpayments

6) Prevent treaty abuse

7) Prevent the artificial avoidance of PE status

14) Make dispute resolution mechanisms more effective

15) Develop a multilateral instrument


OECD’s Automatic Information Exchange Standard

A watershed moment for fighting offshore tax evasion?

An important step towards achieving greater transparency and ending banking secrecyin tax;

Standard provides for annual automatic EOI between governments of financialaccount information, including balances, interest, dividends etc, reported by financialinstitutions and covering accounts held by individuals and entities, including trusts andfoundations;

New consolidated version includes commentary & guidance for implementation bygovernments & financial institutions, detailed model agreements as well as standardsfor harmonized technical & information technology solutions;

Standard to be formally presented to G20 Finance Ministers at their next meeting inCairns, Australia, on September 20-21;

More than 65 countries & jurisdictions already publicly committed to implementation

Recent Developments


OECD approves the 2014 Update to the OECD Model Tax Convention

Changes to Article 26 and its Commentary that were approved by the OECD

Council on 17 July 2012.

Changes also made in

Application of Article 17 (Artistes and Sportsmen) of the OECD Model Tax

Convention

Meaning of ―beneficial owner‖

Tax treaty issues related to emissions permits and credits

Tax treaty treatment of termination payments

Indian Tax Department expands its (social) network! In the case of GE Energy Parts Inc, the tax department sought to use social media (Linkedin

profiles) to lend support to their contention on the existence of a Permanent Establishment (PE).

The Tribunal has also admitted these as evidence and has passed an interim order

Recent Developments


General-Anti-Avoidance Rules (GAAR)

Direct Tax Code (DTC)

Controlled Foreign Corporation (CFC)

Thin Capitalization Regulation

International Taxation : Issues and Challenges


UN Committee of Experts on International Cooperation in Tax Matters

Following Subcommittees and Advisory Group have been formed at the 9th Annual Session of the Committee, 21-25 October 2013:

Article 9 (Associated Enterprises): Transfer Pricing

Base Erosion and Profit Shifting

Negotiation of Tax Treaties — Practical Manual

Exchange of Information

Extractive Industries Taxation Issues for Developing Countries

Tax Treatment of Services

Advisory Group on Capacity Development

http://www.un.org/esa/ffd/tax/subcommittees.htm51November 2014 T P Ostwal & Associates

Whether the tax policy geared to address the concerns of MNEs?

Tax officers (at lower levels) tend to apply domestic tax rules (and approach) unilaterally on international tax issues

Differing and often conflicting views of the authorities, policymakers,

judiciary and taxpayer

Tax Administration and Compliance rules may not follow a ‘business’ approach - resulting in tax controversies and tax evasion

Excessive emphasis on form rather than substance

Adversarial attitude of tax administration

Conflicting decisions at various levels of dispute resolution forums adds to the complexity of Indian tax laws

Uncertainty coupled with substantial period in litigation process


India’s international tax policy is rightly tilted towards source based taxation

in sync with the needs of a developing country

Increase in scope of source based taxation should take into consideration

its effect on inflow of technology/capital

A good tax policy with poor implementation is as good or as bad as wrong

tax policy with efficient administration

Tax policy in the Indian context should also look at the issues of reducing

the trust deficit between the taxpayer and tax collector and address issues

like simplicity, certainty, accessibility, responsiveness, professionalism,

innovation, collaboration and consultation

Single pursuit of revenue could stifle business growth

MNEs don’t mind fair share of tax on their global revenue and appropriate

tax allocation amongst jurisdictions remains a key aspect

Are we on the right path and the way forward



THANK YOU

T. P. Ostwal & AssociatesCHARTERED ACCOUNTANTS

4th Floor, Bharat House,

104 Mumbai Samachar Marg,

fort, MUMBAI-400001.

Tel No.: +91-22-40693900Fax No.: +91-22-40693999

Mobile:+919004660107Email: [email protected]


Documents

RECENT DEVELOPMENTS IN INTERNATIONAL AND …...Transfer Pricing Amendments –Finance Bill 2014 Introduction of Rollback mechanism in Advance Pricing Agreements Strengthening the administrative