Government Panel #2: India
Pacific Rim Tax Conference 2017Pullman San Francisco Bay
March 2017
India Panelists
• Rajat Bansal₋ Joint Secretary, FT & TR – II, Ministry of Finance, India
• Alpana Saksena₋ Chief Tax Officer, Oracle (India)
• Mukesh Butani₋ Managing Partner
Slide 1
Indian Tax Environment
• Moral crusade against black money₋ Income disclosure₋ Demonetization₋ Exchange of information
• Introduction of anti-abuse measures₋ GAAR₋ Treaty changes₋ Thin capitalization₋ BEPS
• Most BEPS action points vindicate India’s position
• However, challenges to MNEs could multiply₋ Unilateral action – equalization levy₋ No mandatory dispute resolution₋ Misalignment with key OECD standards (arbitration)
Slide 2
India Transfer Pricing Litigation - Landscape
2001 – Transfer pricing regulations introduced in India
2002 – Specialist set of officers – Transfer Pricing officer entrusted with transfer pricing audits
2012 – Domestic transactions bought within the ambit of Indian TP regulations & APA rules introduced. Sixth method in TP brought in
2013 – Circular on Contract R&D services and Safe harbor provisions introduced
2015 – Range and multiple year data adopted
2016 – Risk based audits and alignment with BEPS Actions
Slide 3
APA – Recent Developments
IT enabled services (“ITes”)Engineering design servicesSoftware development services Distribution of manufactured goodsRoyalty paymentCorporate guaranteeInterest paymentContract Pharmaceutical ManufacturingAdministrative and business support servicesBankingAutomobileSogo Shosha trading
APA transactions concluded
APAs filed – Over 700+
APAs concluded - 141130 Unilateral
+11 Bilateral APAs*
*As on March 7, 2017
Services transactions (e.g. IT/ITeS) is one of the most litigated sector in the area of Transfer Pricing and hence majority of the APA applications relate to such transactions Slide 4
APA Experiences – Outcomes & Other issues
Outcomes
Definition of pricing policy for
administrative implementation
Definition of cost base
Progressive mark up for services
Change in approach from
arithmetic mean to
percentile
Pricing policy – Cost plus v/s hourly rate
Re characterization – High value v/s
low value
APA – Other issues
Level of Interaction/ Dialogues between
government
Accounting
Indirect tax - service tax/GST
Policy to be adopted in the interim
period
Approach for open matters
Correlative relief clause
in DTAA
Slide 5
Secondary Adjustment – Glocalisation
OECD/ Globally prevalent mechanism to implement Secondary Adjustment – Elective process vs. mandatory approach
High courts have struck down secondary adjustments due to no statutory mandate (Vodafone / Shell) Primary adjustments accepted by taxpayer (self adjustment, audit/ appellate decisions, APA, MAP, Safe Harbor)
₋ Excess Money has be repatriated to India – financial statements to be aligned₋ Deemed to be advance and thereby interest to be imputed
Implications on ongoing audits₋ Risk of double taxation - Article 9 of Model Tax Convention does not deal with the issue of secondary
adjustment and it is a matter of domestic law of contracting states₋ Payment of management fees, AMP transaction, Free of cost transactions?₋ Order by Supreme Court – deemed acceptance?₋ Financial hardship of AE?
Slide 6
Secondary Adjustment – Implications
• Consider an elective approach
• Clarify prospective applicability
• Factor in congruency with the exchange control / VAT
• Clarify whether interest would accrue from the date of transaction
• Not mandate entry in the books of the Related party
India should …
• Fin 48 provisions – provision for tax need to account secondary adjustments
• Transactions where indemnity is involved
• Compelling case for MAP / bilateral APAs to avoid double taxation
• Plan transfer price prior to closing financial statements than making self adjustment in the tax return
Tax payers need to watch out for…
Slide 7
Interest Limitation – BEPS Alignment
Provisions BEPS Action Plan 4 Section 94B
Approach Recommend Interest to EBITDA ratio (10% -30%) and supplements ‘worldwide group ratio rule’
Interest to EBIDTA ratio of 30%
Threshold forapplication
Recommended, amount not specified Interest payments must exceed INR 10 Million
Carry forward ofdisallowed interest
Discussed but period not specified Allowed for 8 years
Deemed interest fromAE
Not specifically covered, however guarantee fee is considered as interest equivalent
Recognized deemed interest from AE based on guarantee/ money deposit by borrower’s AE with Lender
Exclusions Discussed need of specific rules for banking and insurance companies
Excludes banking and insurance companies
Slide 8
Tax policy agenda – 2017 and beyond
Comparability issues and functional issues getting sorted out Use of Profit Split Method – Marketing intangibles / Location savings Profit attribution principles – lack of clarity on single entity vs global formulatory approach Commissionaire agency PE issues Withholding tax on software payments India MLI landscape – treaty interplay including grandfathering
India aligning to BEPS / global standardsSlide 9