India’s Transfer Pricing Laws Must Be In Step With International Practices

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India’s Transfer Pricing Laws Must Be In Step With International Practices
India’s Transfer Pricing Laws Must Be In Step With International Practices

In the last two Budgets there have been two major changes to Indian transfer pricing rules.

Subsidiaries Needing To Pay Interest On Interest:

One of them relates to rules for secondary adjustments which were introduced in 2016 to shore up foreign exchange.

Under it, any adjustment made either during tax audit or Advance Pricing Agreement (APA) or Mutual Agreement Procedure (MAP), would result in the Indian subsidiary of the foreign firm being obliged to bring an equivalent amount of that adjustment from its foreign entity and pay tax on that adjustment.

Earlier rules called for Indian subsidiaries to pay for any higher tax demand, due to audit etc., from its own funds, which resulted in a depletion of its funds.

Under the Indian rule any default in transferring the money is taken as a loan and considers levy of interest. However other countries, such as the U.S. and Australia, consider this a one-time levy attracting no interest. Indian rules are therefore out of step with international practices.

Also with forex reserves of $414 billion, equivalent to 10 months of imports, tax laws must not be considered a vehicle for augmenting forex reserves.

The industry has raised this issue with the government during pre-Budget consultations, highlighting their objection to the form rather than the rule itself, and has expressed hope that the Finance Minister corrects this issue in the forthcoming Budget.

Information Sharing Requirements Not In Line With Global Benchmarks:

The second change relates to information sharing with tax authorities around the globe under BEPS .

While introducing country-by-country (CbC) and Master File reporting requirement for multinational enterprises (MNEs) under the BEPS commitment is not an issue in itself, but having the rules and forms more demanding in information than in other similar economies is putting Indian rules out of step with the BEPS global standards.

These onerous rules place extra compliance burden as well as fear in the mind of the MNEs in India according to industry experts.

One instance of this is that the requirement for the threshold for filing Master File in India is $75 million (€65 million), while the globally adopted threshold is much higher, except for some European countries. Moreover several major countries such as the U.S., the U.K., Singapore, South Africa and Canada still don’t have Master File requirements as of now.

Another issue is that of global information exchange under the BEPS recommendation.

Several countries have given leeway with respect to reporting in the first year of CbC and Master File. However  India has already introduced laws imposing penalties for not filing information on time, regardless of whether the residence country of the MNE has that requirement or not.

The information requirements in India are much higher than envisaged in OECD recommendations.  Industry experts have called for some of these rules getting benchmarked with the global standards in Budget 2018.

 

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