TP including SDT and DTAA
-
Upload
sandeep-jhunjhunwala -
Category
Documents
-
view
115 -
download
0
Transcript of TP including SDT and DTAA
Transfer Pricing including Domestic Transfer Pricing and DTAAICSI Students’ Study Circle Meeting - October 18, 2015
Presented by: Sandeep Jhunjhunwala
WHAT CAN YOU EXPECT IN THIS PRESENTATION
Overview of the Transfer Pricing provisions
Tax Treaty - Insights
Transfer Pricing & Tax Treaty
Open House & Discussions
2 | ICSI Students’ Study Circle Meeting
Transfer Pricing in the news
TP IN THE NEWS
3 | ICSI Students’ Study Circle Meeting
Overview of Transfer Pricing Regulations
5 | ICSI Students’ Study Circle Meeting
TRANSFER PRICING IN INDIA - BACKGROUND
Prior to April 1, 2001
Basic provisions existed but were rarely applied
Expert Group set up in November 1999 to study global transfer pricing practices
April 1, 2001 onwards
Sections 92 to 92F of the Act read with Rules 10A to 10T referred to as framework of Indian TP legislation
Largely based on the OECD Transfer Pricing Guidelines
Comprehensive legislation introduced in Union Budget 2001
Detailed Rules providing guidance for application of the legislation framed
One way effect - TP adjustments cannot reduce tax computed on income as in books
Mandatory TP documentation and Form 3CEB filing
Administrative guidelines for audit - Recent CBDT direction to field officers
Is still in evolving stage- taxpayers seek clarity on various matters
6 | ICSI Students’ Study Circle Meeting
CONCEPT OF TRANSFER PRICING
Section 92(1) - Transfer Pricing refers to pricing of international transactions between two associated enterprises (AEs)
A price between unrelated parties is known as the Arm’s Length Price (ALP)
Due to special relationship between related parties, transfer price may be different than the price that would have been agreed between unrelated parties
International transactions– Tangibles
Intangibles
– Services
– Capital Financing
– Business structuring
Independent Entity
Resident
Associated Enterprise
Resident
7 | ICSI Students’ Study Circle Meeting
APPLICABILITY
The provisions of Sections 92 to 92F of the Act are applicable only if:
There are two or more enterprises (defined in Sec 92F)
The enterprises are Associated enterprises (defined in Sec 92A)
The enterprises enter into a transaction (defined in Sec 92F)
The transaction is an international transaction/ deemed international transaction/ specified domestic transaction (defined in Sec 92B/ 92BA)
Consequences of these provisions:
Computation of income/ expenses having regard to the Arm’s length price [Section 92(1)]
Maintenance of prescribed documentation (Section 92D & Rule 10D)
Obtaining Accountant’s report under Form 3CEB (Section 92E)
To ensure compliance with the arm’s length principle; stiff penalties prescribed for non-compliances (Section 271, 271AA, 271BA, 271G etc)
The revenue/ profits generated by a company should be attributable to Functions performed, Assets deployed and Risks assumed in its business operations
8 | ICSI Students’ Study Circle Meeting
INTERNATIONAL TRANSACTION (SEC 92B)
Transactions between two or more associated enterprises, either or both of whom are non-residents
Transaction relates to:
Purchase, sale or lease of tangible/ intangible property; or
Provision of services; or
Lending or borrowing money (capital financing); or
Any other transaction of business restructuring or reorganization irrespective of the fact of having a bearing on the profits, income, losses or assets of such enterprises; or
Mutual agreements/ arrangements for allocation or apportionment of, or any contribution to, any cost or expense incurred/ to be incurred in connection with a benefit, service or facility provided/ to be provided to any one or more of such enterprise.
Transaction includes arrangement, understanding or action in concert:
whether formal or in writing
whether intended to be enforceable with legal proceedings or not
Transaction also includes number of closely linked transactions [Rule 10A(d)]
9 | ICSI Students’ Study Circle Meeting
SPECIFIED DOMESTIC TRANSACTIONS (SEC 92BA)
SDTIf aggregate exceeds
INR 20 crore in a year
(applicable from FY 2012-13)
Inter unit transfer of goods & services by tax holiday undertakings to which profit-linked deductions apply
Expenditure incurred between
related parties defined under Section 40A of
the Act
Any other transaction that may be
specified
Transactions between tax holiday undertakings to which profit-linked deductions apply, having close connection
SDT provisions would impact industries which benefit from the preferential tax policies such as SEZ units, infrastructure developers or operators, telecom services, industrial park developers, power generation etc
10 | ICSI Students’ Study Circle Meeting
DEEMED INTERNATIONAL TRANSACTION [SEC 92B(2)]
Parent Company 3rd Party
Subsidiary
Prior agreement
Services
Parent Company 3rd Party
SubsidiaryServices
Determination of terms
An unrelated company (3rd Party) is deemed to be an associated enterprise of a company (A) and subject to transfer pricing regulations if:
– a prior agreement exists between A's AE and 3rd party in relation to services rendered by A to the 3rd party
An unrelated company (3rd Party) is deemed to be an associated enterprise of a company (A) and subject to transfer pricing regulations if:
– terms of transaction are determined in substance by A’s AE and 3rd party
Recently amended to clarify that third party can be a resident or non-resident India
11 | ICSI Students’ Study Circle Meeting
ASSOCIATED ENTERPRISES (SEC 92A)
Direct or indirect participation (through one or more intermediaries) in management or control or capital
A
C
B
A
C
B E
Both A and B are associated enterprises of C
D and E are also associated enterprises of C since they have a common ultimate parent (A)
D
12 | ICSI Students’ Study Circle Meeting
DEEMED ASSOCIATED ENTERPRISES [SEC 92A(2)]
1. >= 26 percent direct / indirect holding by enterprise
OR
2. By same person in each enterprise
3. Loan >= 51 percent of total assets
4. Guarantees >= 10 percent of debt
5. >10 percent interest in Firm / AOP / BOI
6. Appointment > 50 percent of Directors/ one or more Executive Director by an enterprise
OR
7. Appointment by same person in each enterpriseS
8. 100 percent dependence on use of intangibles for manufacture/ processing/ business
9. Direct/ indirect supply of >= 90
percent raw materials under influenced prices and conditions
10.Sale under influenced prices and conditions
11. One enterprise controlled by an individual and the other by himself or his relative or jointly
12. One enterprise controlled by HUF and the other by itself, a member or his relative or jointly
Equity Holding Management Activities Control
ARM'S LENGTH PRICE (ALP)
Determination of ALP using one of the prescribed methods
Whether you arrive at a single
price?The price thus determined is the ALP, mostly not possible
The arithmetic mean of such prices or a price which varies from such arithmetic mean by
+/-3 percent (tolerance band) is the ALP
Yes
Price applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions
No
13 | ICSI Students’ Study Circle Meeting
ALP - origin in the Contract Law - to arrange an equitable agreement that will stand up to legal scrutiny, even though the parties involved may have shared interests - Based on the separate entity approach
PRESCRIBED METHODS
14 | ICSI Students’ Study Circle Meeting
Rule 10AB/ 10B - Prescribed by CBDT
Transactional Net Margin
Method (TNMM)
Profit Split Method (PSM)
Cost Plus Method (CPM)
Resale Price Method (RPM)
Comparable Uncontrolled Price (CUP)
Traditional Transaction Methods Transactional Profit Methods Other Method
OECD prefers traditional transaction methods over transactional methods [Chapter III, 3.49]
TNMM (and CUP) rules the roost
Indian rules prescribe no guidance/ hierarchy - legal view is to follow chronological order
Any other method prescribed by the Central Board of Direct Taxes (CBDT) - Rule 10AB
Appropriateness of the method considered based on functional analysis
15 | ICSI Students’ Study Circle Meeting
TRANSFER PRICING METHODS - IN GENERAL
CUP Method compares prices charged or paid
RPM compares gross margins
CPM compares profit mark-ups on costs
PSM refers to the total profits from transactions and splits them among the parties based on the level of contribution
TNMM analyses net profit in relation to an appropriate base such as costs, sales or assets
Other method [Rule 10AB] - "Any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.”
Methods Comparability requirements
Benchmarking Remarks
CUP Very High Prices Very difficult to apply asvery high degree ofcomparability required
RPM High Gross Profit margins
Difficult to apply as highdegree of comparabilityrequired
CPM High Profit mark-ups on costs
PSM Medium Operating Profit margins
Complex Method,thinly used
TNMM Medium Operating Profit margins
Most commonly usedmethod
16 | ICSI Students’ Study Circle Meeting
TRANSFER PRICING METHODS - IN GENERAL
CUP used for transactions involving homogeneous products (eg traded commodities), interest rate charged on a loan, royalty payments, franchise fees or license fees
RPM used for distributors ie when goods purchased from related parties and sold to independent parties
CPM used in cases involving manufacture, assembly or production of tangible products or services that are sold / provided to related parties
PSM is appropriate where both parties to the transaction make unique and valuable contributions or where the transaction involves highly integrated operations for which a one sided approach would not be appropriate
TNMM - Applicable for any type of transaction and often used to supplement analysis under other methods, most frequently used method in India
Rule - 10AB, provides for applying any other method that gives better picture of ALP of such transactions - Intangible assets, IPRs, Technical know-how, R&D services
17 | ICSI Students’ Study Circle Meeting
COMPARABLES
All methods require comparables
Transfer price is set/ defended using data from comparable transactions
Comparable transaction should be independent and similar to tested transactions
Factors for judging comparability (Rule 10C(2)):
Nature of transactions undertaken (ie type of goods, services etc)
Company functions
Risks assumed
Contractual terms (ie similar credit terms)
Economic and market conditions
18 | ICSI Students’ Study Circle Meeting
DOCUMENTATION
Profile of industryProfile of group Profile of Indian entityProfile of associated enterprises
Transaction termsFunctional analysis (FAR related)Economic analysis (method selection, comparable benchmarking)Forecasts, budgets, estimates
AgreementsInvoicesPricing related correspondence (letters, emails etc)
Price related Transaction related
Contemporaneous documentation requirement
Documentation to be retained for 9 years from the financial year
Documentation is not required to be maintained if the aggregate value of international transactions does not exceed INR 1 crore
Entity related
Description and analysis of uncontrolled transactionsDescription and analysis of methods considered and adopted
Methodology related
19 | ICSI Students’ Study Circle Meeting
ACCOUNTANT’S REPORT (FORM 3CEB) - RULE 10E
Obtained by every tax payer filing a return in India and having international transaction
To be filed by due date for filing return of income
Essentially comments :
whether the tax payer has maintained the transfer pricing documentation as required by the legislation;
whether as per the transfer pricing documentation the prices of international transactions are at arm’s length, and
certifies the value of the international transactions as per the books of account and as per the transfer pricing documentation are “true and correct”
20 | ICSI Students’ Study Circle Meeting
TRANSFER PRICING & OTHER TAX LINKAGES
Common aspects required to be analyzed while preparing TP report
PE implications
International tax structure
Foreign jurisdiction lawsTreaty provisions
Customs issues Withholding tax issues
Economic substance Intangible valuations
TP Architecture
Tax Treaty - Insights
22 | ICSI Students’ Study Circle Meeting
WHAT IS TAX TREATY?
What is a tax treaty?
Tax treaties are international agreements entered into between Governments for the allocation of fiscal jurisdiction so as to avoid double taxation of the same income
The purpose of the DTAA is to remove impediments to the flow of trade and investment by the elimination of international double taxation
What is the purpose of a tax treaty?
Elimination of double taxation
Clarification of fiscal situation of tax payer
Sharing of tax revenues between contracting countries
Promotion of cross border trade
Exchange of information to combat tax avoidance/ tax evasion
Section 90 of the Act empowers the Central Government to enter into tax treaties with the government of any foreign country
The provisions of the Act shall apply to the extent they are more beneficial than the provisions of the treaty
23 | ICSI Students’ Study Circle Meeting
NATURE OF TAX TREATY
Types of tax systems followed
Residence based tax system
Connecting factor is "residence" Country of residence has the primary jurisdiction to tax In case of conflict "tie-breaker test"
Source based tax system
Connecting factor is "income" Country of source shall restrict its right to tax
Country of residence will give credit for tax paid in the country of source
Transfer Pricing and Tax treaty
25 | ICSI Students’ Study Circle Meeting
ARTICLES OF TAX TREATY
SCOPE PROVISIONS
1. Article 1 - Personal Scope2. Article 2 - Taxes covered3. Article 29 - Entry into force4. Article 30 - Termination
ANTI-AVOIDANCE
1. Article 9 - Associated Enterprise2. Article 26 - Exchange of Information
ELIMINATION OF DOUBLE TAXATION
1. Article 23 - Elimination of double taxation
2. Article 25 - Mutual Agreement
DEFINITION PROVISIONS
1. Article 3 - General definitions2. Article 4 - Residence3. Article 5 - Permanent
Establishment
SUBSTANTIVE PROVISIONS
1. Article 6 - Immovable property2. Article 7 - Business Profits3. Article 8 - Shipping, etc4. Article 10 - Dividends5. Article 11 - Interest6. Article 12 - Royalties & TSF7. Article 13 - Capital gains8. Article 14 - Independent Personal Services9. Article 15 - Dependent Personal Services10. Article 16 - Directors11. Article 17 - Artistes & Sports persons12. Article 18 - Pensions13. Article 19 - Government service14. Article 20 - Students15. Article 21 - Other income16. Article 22 - Capital
MISCELLANEOUS PROVISIONS
1. Article 24 - Non-discrimination2. Article 27 - Diplomats3. Article 28 - Territorial Extension
26 | ICSI Students’ Study Circle Meeting
ARTICLE 9 - ASSOCIATED ENTERPRISES
Article 9 confirms in a treaty situation:
the domestic right of a contracting state
to adjust the profits of an enterprise located on its territory, which is managed, held or controlled directly or indirectly by an enterprise of the other contracting state
If the conditions in their relationship differ from the conditions which would have been stipulated between independent enterprises (ie other than on arm’s length terms)
27 | ICSI Students’ Study Circle Meeting
ARTICLE 27 - MUTUAL AGREEMENT PROCEDURES
If taxpayer has been subjected to tax not in accordance with provisions of the tax treaty, then MAP could be exercised
Under MAP, competent authorities from states concerned try to resolve tax issues
Article 27 provides for a machinery whereby competent authorities can interact between themselves to resolve all outstanding issues amicably
Taxpayer can take recourse to MAP even before tax has been levied
Time limit for MAP application is 3 years from date of first notification of action leading to taxation not in accordance with DTAA
The tax payer has an option to follow the decision given under MAP