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TRANSFER PRICINGINTRA GROUP SERVICES (IGS)CHAMBERS OF TAX CONSULTANT – 06th July, 2016
SN & Co.Chartered Accountants
INTRODUCTION
MNE group may obtain services directly or indirectly from independent
companies, or from companies of same MNE group (i.e. intra-group)
Benefits of intra group services
o Economies of scale, synergy, efficient use of resources & high degree of specialization
o Developing own expertise, coordination & control and avoiding duplication of work
Intra Group Service (“IGS”) includes
o Services by One member to other member or members of MNE
o Services provided by group of members for the benefit of overall group
o Service by Parent company to member & group of members
o Service from third party on behalf of member or members
SN & Co.Chartered Accountants 2
I
N
C
L
U
S
I
O
N
S
T
O
I
G
S
Planning and Budgetary control
Coordination
Financial and Legal advice
Management and Administrative services
Accounting and Auditing service
Computer services & SAP Consulting service
Human Resource services
Credit risk analysis service
Marketing & Distribution support service
Resource Sharing service
Reimbursement of ASP
R&D service
SN & Co.Chartered Accountants 3
INTRAGROUP SERVICES
IGS
Chargeable service
LVAS
TP Simplified
HVAS
Full TP
Non chargeable service
Shareholder Duplication Incidental
4
WAY To ALP
Chargeable services
Benefit Test
Economic Benefit
Received Anticipated
Independent party
ALP
Charging
Direct Indirect
Calculation
CupCost plus
TNMM
6
SHAREHOLDER SERVICE
Activities carried out even though group members do not need the activity
Activity is performed solely because of its ownership interest in its capacity asshareholder
An independent entity would not be willing to pay for service and thus would notjustify a charge to the recipient
Examples:
o appointment and remuneration of parent company directors
o meetings of the parent company’s board of directors and shareholder
o activity of parent company’s in preparation and filing of consolidated financialreports
o activities of parent company for raising funds used to acquire share capital insubsidiary companies; and
o activities of the parent company to protect its capital investment in subsidiarycompanies.
SN & Co.Chartered Accountants 8
DUPLICATION SERVICE
Service provided to AE which has already obtain same service either by itself or
from independent entity – Eg. Legal opinion
Exceptions – Duplication service being IGS
Service providing benefit to AE for which an independent party would also be
willing to pay
Temporary service - Example - process of being centralized for an MNE group
Service undertaken to reduce risk of a wrong business decision (e.g. by getting a
second legal opinion on a subject)
SN & Co.Chartered Accountants 9
INCIDENTAL BENEFITS/PASSIVE
ASSOCIATION
IGS performed by a group member relates only to some group members but
incidentally provides benefits to other group members
AE has not received IGS when it obtains incidental benefits attributable solely
being part of a larger GROUP, and not to any specific activity being performed
SN & Co.Chartered Accountants 10
• Whether AE received enhance credit rating by reason of its affiliation with larger group; is IGS ?
• Whether guarantee given by group member increasing credit rating is IGS?
• Whether supplier giving additional credit based on guarantee given by IGS?
• Where the enterprise benefitted from global marketing and public relations campaigns done by Group Company ?
Contd…
SN & Co.Chartered Accountants 11
CENTRALIZED SERVICES
MNE group often will
centralize certain business
functions within an associated
enterprise and wide variety of
services are centralized both
low and high-value adding
services
SN & Co.Chartered Accountants 13
ON CALL SERVICES
Parent company or a group service centre may be on call to provide services atany time, by having staff, equipment etc. available all the time
An intra-group service would exist to the extent that it would be reasonable toexpect an independent enterprise in comparable circumstances to incur ‘standby’charges to ensure the availability of the services when the need for them arises(e.g. a service contract for priority computer network repair in the event of abreakdown)
On call service can be considered as IGS even if the actual services are never orinfrequently provided
SN & Co.Chartered Accountants 14
INTRA GROUP SERVICES
52
3
14
1. Shareholder service
2. Duplication service
3. Incidental benefits/Passive Association
4. Centralized services
5. On call services
SN & Co.Chartered Accountants 15
METHOD OF CHARGING FOR IGS
The charge should be that which would have been made and accepted between independent enterprises in comparable circumstances.
A tax administration would need to identify what arrangements have been made between AEs to facilitate charges between them:
o Direct charge method
o Indirect charge method
Directly Allocable Cost:
• Services that can be identified as directly benefiting a particular group company,thus allowing the costs to be directly assigned
• Provides greater transparency to the tax authorities
SN & Co.Chartered Accountants 17
Contd…
Indirectly Allocable Cost:
Used where proportion of the value of services rendered to each entity cannot beexactly quantified except on an approximate or estimated basis.
Identify all relevant costs and allocate them among all recipients using sensibleallocation key/s.
Allocation of cost should commensurate with the benefit derived by the recipient
Allocation method chosen must lead to a result that an independent enterpriseswould have been prepared to accept
SN & Co.Chartered Accountants 18
Indirectly Allocable Cost:
Allocation keys shall be based on the nature of service:
o IT: number of PCs
o Business management software (e.g. SAP): number of licences
o Human Resources: headcount
o Health and safety: headcount
o Management development: headcount
o Tax, Accounting, etc.: turnover or size of balance sheet
o Marketing services: turnover
o Vehicle fleet management: number of cars
Contd…
SN & Co.Chartered Accountants 19
Service Provider
How much does the service cost?
Service Recipient
How much is the service worth?
How much would a comparable independent enterprise be prepared to pay forthat service in comparable circumstances?
How much would it cost to provide the service in-house?
How much would an external service provider charge?
IGS – A DOUBLE EDGED SWORD
SN & Co.Chartered Accountants 20
DETERMINATION OF ALP
Minimum price acceptable for provider
Maximum price acceptable for recipient
Range of AL Prices
SN & Co.Chartered Accountants 21
CALCULATION OF ALP
• ALP generally is calculated using methods:
o CUP
o CPM
o TNMM
• A CPM would most likely be the most appropriate method where thenature of the activities involved, assets used and risks assumed arecomparable to those undertaken by independent enterprises
• Challenge in Cost Plus : Cost comparison & availability of gross margin inservice industry
• TNMM : Sustains variables as comparison is at Net margin
SN & Co.Chartered Accountants
22
CASE STUDY
Cushman & Wakefield India Pvt Ltd (Delhi
High Court)
M/s. Fosroc Chemicals India Pvt. Ltd (Bangalore ITAT) [ITA No. M.P. No.47/Bang/2015]
Reimbursement to AEs of cost for coordination
and liaison service
Technical and management services under CCA
Sec 92(3) does not allow to reduce profit
which was rejected by HC
AO after reference to TPO cannot verify the
allowability of claim u.s 37 was also rejected
by HC
HC demands benchmarking of cost to cost
arrangement from ALP test to verify price
charge and to verify whether the cost is
inflated or not
• Commercial expediency can be verified by AO
and not TPO
• In a case where expenses are actually
reimbursed without a mark-up, tax base erosion
can happen only if the costs reimbursed are
inflated.
• It is important to determine whether the costs
claimed to have been apportioned between the
various group entities have not been inflated and
are allocated on a proper basis
SN & Co.Chartered Accountants
23
• Documents evidence for rendering of service
• Cost allocation methodology
• Benchmarking study
• Intercompany agreement
SN & Co.Chartered Accountants 24
DOCUMENTATION
CHECKLIST OF DOCUMENTS FOR INTRA
GROUP SERVICES Sr No Particulars Docs to be collected
Local entity
Parent entity
1. Intercompany service agreement
2. Evidence demonstrating receipt of service
3. Copy of emails, correspondence etc demonstrating scope of work and negotiation of price between group companies
4. Copy of invoices raised – recommended by BEPS for LVAS
5. Details of cost incurred by group company for providing such services
6. Documents demonstrating the charge made on other group entities
7. In case of allocation of cost, certificate from an independent auditor certifying the basis of allocation key used and calculation of charges
8. Benchmarking study done/ Transfer pricing report
9. Detail write up should be maintained to demonstrate following points:
o Difference between regular service received by local entity v/s headquarter service received so as to prove that there is no duplication of service
o Reasons for availing such service
o Documents to substantiate that the services were actually received and were consistently received
SN & Co.Chartered Accountants
25
SN & Co.Chartered Accountants 26
INDIAN APPROACH – TP AUDIT
Benefits Test – IGS service been
provided?
Justification of mark-up – Routine
services vs. value added services
Intra group charge - Cost
allocation / cost base working
Documentation
CHALLENGES
Evidencing that
the recipient
required these
services
Evidencing that
the recipient has
actually received
the services
Evidencing the
commercial/econ
omic benefit
derived by the
recipient
Need Test Evidence Test Benefit TestChargeable
services
Non
Chargeable
services
SN & Co.Chartered Accountants 27
No No No
McCann Erickson India Pvt Ltd. - (Delhi ITAT) ITA No. 5871/Del/2011 -Management and co- ordination service
o Need Test: Only a business expert can evaluate true intrinsic and creativevalue of services received. Reference of need test complied by the taxpayer
o Benefit Test: Over the years 14% revenue growth substantiated by Taxpayer
o TNMM justified if
o Transaction if interrelated
o Nexus with core revenue generating activity
o No revenue generating capacity in isolation
o Only one class of business
o DRP direction of reducing adjustment to 40% cannot by denied by the TPO &AO
CASE STUDY
SN & Co.Chartered Accountants 28
Dresser Rand India Pvt. Ltd. - (Mumbai ITAT) ITA No. 8753/Mum/2010 - HR, Treasury, various support services
o Need Test : Tax authorities cannot question the commercial expediency, Inhouse presence of team does not stop AE to take specialised service
o Evidence Test : Contemporaneous documentation submitted – 300 pages
o Benefit Test : TPO did trend analysis of growth in the business (being firstyear of service) and in absence of increase in growth contented that theservice was not required – not accepted by Tribunal
o Separation of transaction and benchmarking it not possible and TNMMaccepted as most appropriate method
Contd…
SN & Co.Chartered Accountants 29
TNS India Pvt Ltd (HYD ITAT) ITA No 944/HYD/2007 – Evidence test accepted based ondetailed submission of functions performed by AE without corroborateddocumentation
Contd…
SN & Co.Chartered Accountants 30
Gemplus India Pvt. Ltd.
(Bangalore ITAT) ITA
No.352/Bang/2009
Marketing and sales and
other support, customer
No details available on record in respect
of services rendered
Taxpayer has not proved any
commensurate benefits against the
payments of service charges to its
Singapore affiliate
Cost must be allocated on actual basis
and not on pre determine basis
Knorr-Bremse India Pvt. Ltd.
(Delhi ITAT) ITA No. 5097/Del/2011
SAP implementation fees CUP method rejected
AWB India Pvt. Ltd.
(Delhi ITAT) ITA No.
4454/Del/2011
o Not possible to document every receipt of the service in
question
o Tax authorities cannot question the commercial expediency
o CUP method applied by the TPO cannot be considered in
view of non-availability of CUP data
Avery Dennison India Private
Limited v. ACIT (Delhi ITAT) (ITA
No.4868/Del/2014)
o The HC held in the case of the taxpayer that mere
profitability or benefit cannot be the basis for determination
of ALP for intra-group service fee payments.
o The Tribunal, has observed that the intra-group services, if
part of a composite contract, cannot be unbundled for the
purpose ALP determination, and thereby allowed
aggregation of the transaction under TNMM.
Contd…
SN & Co.Chartered Accountants 31
LOW VALUE ADDED INTRA-GROUP
SERVICES
The guidance defines LVAS are services which are:
o are supportive in nature,
o are not part of the core business of the group,
o do not use or create unique and valuable intangibles, and
o do not involve significant risk.
SN & Co.Chartered Accountants 33
Specific areas to be considered:
o Has a service been provided? : Service that provides economic or commercial value and thatthe recipient would have paid for the activity or else performed the service itself.
o Cost pools: Calculate pool of all costs incurred by all members of the group in performing lowvalue-adding intra-group services. Reduce specific cost and Shareholder costs From it.
o Invoicing: Invoices are often not available where the costs attributed are internallyapportioned direct or indirect costs. In those circumstances an explanation of the logic andprocess applied to arrive at the attributed costs will be needed.
o Allocation keys: Different rationales will be applied in deciding upon the allocation key. Whatis important is that any allocation key can be justified, consistently applied and reviewed on aregular basis.
o Mark-up considerations: As it concerns low value added services, only a modest mark up toan appropriate cost base should be applied. The Guidelines indicate that typically agreedprofit elements tend to falling a range between 3-10%, often around 5%.
Contd…
SN & Co.Chartered Accountants 34
STEPS TO BE ADOPTED WHEN DEALING
WITH INTRA-GROUP SERVICES
Identify whether a service has been performed, the type of service that has beenperformed and the value of the service.
Identify the benefits to the service recipient.
Identify shareholders’ activities, service duplication and whether the servicerecipient would have paid a third party to provide the service.
Determine which income or cost to be charged.
Identify costs that could be charged directly.
Determine an allocation key for charging indirect costs.
Determine the arm’s length price by calculating an appropriate mark-up.
SN & Co.Chartered Accountants 36
INTRAGROUP SERVICES
IGS
Chargeable service
LVAS
TP Simplified
HVAS
Full TP
Non chargeable service
Shareholder Duplication Incidental
37SN & Co.Chartered Accountants
DETERMINATION OF ALP
Minimum price acceptable for provider
Maximum price acceptable for recipient
Range of AL Prices
SN & Co.Chartered Accountants 38
40
CA. Darshak Shah S N & CoChartered Accountantso Tax o Audit o Consulting
Borivali (w) :::: Sion (w)Tel No. 022-28910968
+91-9699915474Website: www.snco.inEmail Id: [email protected]