Transfer pricing 2013 sept 20th by vikram singh sankhala

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Transfer Pricing Presentation updated upto September 20th and including the Safe Harbour Rules notified on Sept 18th

Transcript of Transfer pricing 2013 sept 20th by vikram singh sankhala

  • Transfer Pricing as of 18th Sept 2013 including the Safe Harbour Rules Vikram Sankhala
  • The Law
  • The entire concept of Transfer Pricing revolves around the following Three Key Concepts 1. International Transaction (including Specified Domestic Transactions) 2. Associated Enterprise 3. Arms Length Price
  • The Basic Principle of Transfer Pricing An international transaction between Associated entities needs to be at an Arms Length price.
  • So what do the Tax Authorities do They ask you to report all international transactions between Associated entities and to maintain support documentation to establish this. There is a threshold limit of the aggregate of such transactions being Rs 5 Crore. They also conduct Transfer Pricing Audits to scrutinize your documentation and the method you have adopted to establish this.
  • International Transfer Pricing provisions are covered under Section 92 to 92F in the Indian Income Tax Act, 1961; Rule 10A to Rule 10T of the Income Tax Rules; Sections 271(1)(c), 271 AA, 271 BA and 271 G.
  • Relevant Provisions Computation of income from international transaction having regard to arms length price - Section 92 of the Income tax Act, 1961 (the Act) Meaning of associated enterprises - Section 92A of the Act Meaning of international transaction - Section 92B of the Act Computation of arms length price - Section 92C of the Act Reference to transfer pricing officer - Section 92CA of the Act Power of Board to make safe harbour rules - Section 92CB of the Act Maintenance and keeping of information and document by person entering into an international transaction - Section 92D of the Act
  • Relevant Provisions Provision Section of the IT Act Report from an accountant to be furnished by person entering into international transaction Section 92E of the Act Definitions of various terms Section 92F of the Act Penalty consequent to re-determination of arms length price Explanation 7, Section 271(1)(c) of the Act Penalty for failure to keep and maintain information and document in respect of international transaction Section 271AA of the Act Penalty for failure to furnish report under section 92E Section 271BA Penalty for failure to furnish information or document under section 92D Section 271G
  • Relevant Provisions Provision Section of the IT Rules Meaning of certain expressions Rule 10A of the Income tax Rules, 1962 (the Rules) Determination of arms length price under section 92C Rule 10B of the Rules Most appropriate method Rule 10C of the Rules Information and documents to be kept and maintained under section 92D Rule 10D of the Rules Report from an accountant to be furnished under section 92E Rule 10E of the Rules Advance Pricing Agreements Rule 10F to 10S of the Rules Safe Harbour Rules Rule 10T of the Rules
  • The Economics of Transfer Pricing Where tax rates are different between tax jurisdictions, there is a strong incentive to shift income to a lower tax jurisdiction and deductions to a higher tax jurisdiction so that the overall Tax Rate is minimized.
  • What it means to the Jurisdiction As the aggregate tax payable by MNCs is reduced, tax authorities across the world incur significant losses. To guard against such losses, many countries have introduced transfer pricing legislation to govern the pricing of cross border transactions between related parties.
  • India introduced rules and regulations on transfer pricing as of 2001 through sections 92A to 92F of the Indian Income tax Act, 1961 which guides computation of the transfer price and suggests detailed documentation procedures.
  • On Whom does TP Apply Transfer Pricing Regulations ("TPR") are applicable to the all enterprises that enter into an 'International Transaction' with an 'Associated Enterprise'. Therefore, generally it applies to all cross border transactions entered into between associated enterprises.
  • What is the Purpose The aim is to arrive at the comparable price as available to any unrelated party in open market conditions and is known as the Arm's Length Price ('ALP').
  • Associated Enterprises ('AEs')- How Identified? The basic criterion to determine an AE is the participation in management, control or capital (ownership) of one enterprise by another enterprise. The participation may be direct or indirect or through one or more intermediaries.
  • Participation in management Appointment of more than half of Board of Directors/ Board of Members/ one or more Executive Directors/ Executive Members by : - The other Enterprise - The same person(s) in both the enterprises.
  • Participation through Capital Holding not less than 26% of the voting power directly or indirectly - in the other enterprise - in each of such enterprise
  • Participation through Control Loan not less than 51% of Book value of Total Assets Guarantee not less than 10% of Total borrowings Use of Know how, patents, copy right, etc., of which other enterprise is owner or has exclusive rights Purchase of 90% or more Raw Materials and Consumables for which prices and other conditions are influenced Sale of goods manufactured or processed to other enterprise or person specified by it for which prices and other conditions are influenced or Controlled by same person
  • Apart from these, any relationship of mutual interest, as may be prescribed shall also be considered as Associated enterprise.
  • What is an International Transaction? International transaction means any of the following nature of transactions between two or more Associated enterprise where, either or both of whom are non-residents (a) purchase, (b) sale, (c) lease of tangible or intangible property, (d) provision of services, (e) lending or borrowing money, or (f) any other transaction having a bearing on the profits, income, losses or assets of such enterprise. (e) Mutual agreement between AEs for allocation/apportionment of any cost, contribution or expense.
  • Deemed International Transaction [Sec 92B] Further section 92B provides that, where a transaction entered into by an enterprise with a person other than an associated enterprises and there exist a prior agreement in relation to the relevant transaction between such other person and associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprises then such transaction shall also be treated as an international transaction.
  • Specified Domestic Transactions if the aggregate value exceeds Rs 5 Crores The Finance Act 2012 extended the scope of Transfer Pricing provision to Specified Domestic Transactions (SDT). The SDT would include the following: Expenditure for which payment is made or to be made to domestic related parties-40A 2(b) payment Tax Holiday/ Deductions claimed by the taxpayer, where; Transfer of goods or services between various businesses of same taxpayer More than ordinary profits derived from transactions with closely connected persons
  • SDT The amendment is in accordance with the suggestion made by the Supreme Court in case of Glaxo Smithkline Asia (P) Ltd.
  • Arms length price Arms length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.
  • TP Methods (a) Comparable uncontrolled price method (b) Resale price method (c) Cost plus method (d) Profit split method (e) Transactional net margin method (f) Such other method as may be prescribed by the Board
  • Comparable uncontrolled price method In this method, price charged in an uncontrolled deal between comparable entities is recognized and evaluated with the verified entity price to determine the Arms Length Principle. The CUP method offer the finest evidence of ALP.
  • Comparable uncontrolled price method is relevant in case of transaction of loans, royalties, services, transfer of tangibles.
  • Resale price method This method is used where the vendor adds similarly little value to goods owned from associate enterprises. Here, Arms Length Price is determined by reducing the relevant gross profit mark-up from