News letter for the month of April,2012
ITAT upholds important transfer pricing principles on characterization and rewards for selling activity
Finance Minister, Mr. Pranab Mukherjee has been ranked fifth in the list of top forces that effectively deal with Transfer pricing disputes and other issues concerning transfer pricing. This rank was prepared by TPweek, by obtaining poll-responses from various sources and from the public.
Besides Mukherjee, the other leading forces who got the ranks, were Organisation for Economic Cooperation and Development (OECD), PricewaterhouseCoopers (PwC), ActionAid and Taskforce on Financial Integrity and Economic Development, revealed the poll conducted by TPWeek.
Around 700 readers comprising tax directors, transfer pricing advisers, non-governmental organisations among others chose the five leading forces in global transfer pricing.
Transfer pricing deals with the technique, wherein parent companies sell goods and services to subsidiaries in other countries to minimise tax liability.
The Indian minister of finance was nominated for his power to implement an APA (Advance Pricing Agreement) programme in India. This is a long-awaited development for Indian tax payers and the new option for certainty will go some way to alleviating taxpayers' dispute in the country and may encourage more foreign direct investment, TPWeek said.
According to the 2012-13 Budget memorandum, Advance Pricing Agreement (APA) is an agreement between a taxpayer and a taxing authority on an appropriate transfer pricing methodology for a set of transactions over a fixed period of time in future. This may be effective very soon in this financial year.
The APAs offer better assurance on transfer pricing methods and are conducive in providing certainty and unanimity of approach.
The minister's power to influence India's standing in global economics through the tax system influenced a number of voters.
The law requires that goods and services should be sold to subsidiary companies at arm's length price -- the price at which goods are traded between uncontrolled companies.
TPWeek said that Mukherjee also has the power to implement the inter-quartile range and the acceptance of multiple-year data, bringing Indian transfer pricing further in line with global best practices.
Experts said that the APAs offer better assurance on transfer pricing methods and are conducive in providing certainty and unanimity of approach.
Others who have been nominated by the TPWeek include OECD for their project on intangible assets, PwC for its report on transfer pricing in developing countries.
Besides, ActionAid was nominated for its report on drinks company SAB Miller, entitled Calling Time: Why SAB Miller should stop dodging taxes in Africa.
The NGO -- The Taskforce on Financial Integrity and Economic Development -- was nominated for its campaigns for improved transparency and accountability in the global financial system.
In response to the 2011 update of the UN Model Convention which was launched on 15.3.2012, the CBDT has addressed a letter dated 12th March 2012 in which it has registered its objections to the provisions in the UN Model Convention. In particular, the CBDT has stated:
Even though OECD Transfer Pricing Guidelines do not address the concerns of developing countries, paragraph 3 of the proposed UN Model Convention Commentary of Article 9 indicate that former non-governmental Group of Experts (year 1999) had stated that all the countries including developing countries will follow the OECD principles as set out in the OECD Transfer Pricing Guidelines for the reasons that these guidelines represent internationally agreed principles. The former expert group had also recommended that the Guidelines should be followed for application of the arm’s length principles. However, it has been clarified in the new commentary that views expressed by the former Group of Experts have not yet been considered fully by the Committee of Experts as indicated in the Records of its annual session. India believes that the Committee of Experts do not have jurisdiction to decide the critical issue of whether the OECD Transfer Pricing Guidelines agreed by Governments of developed countries should be followed by the Governments of the developing countries when these Governments are not party to the OECD Transfer Pricing Guidelines. India does not believe that decision of former Group of Experts can be interpreted that subsequent revision of OECD Guidelines (after 1999) will automatically become the internationally agreed standards and United Nations guidance will automatically change without participation and agreement by non-OECD countries. India believes that taking such decision was not within the purview of non-governmental Committee of Experts (1999) and should be revoked immediately.
India believes that OECD Transfer Pricing Guidelines cannot be imported to UN guidance particularly when such recommendations of the group in 1999 is not considered by the present committee and is beyond the scope of non-governmental committee
India further believes that in the revision of UN Model Convention, which is due to be released on 15th March, 2012, concerns of developing countries have not been taken into consideration, as it has been developed by Group of Experts and sub-committees having non-governmental representatives and disproportionate representations from OECD countries. India will submit its detailed comments once the revised UN Model Convention is made public.
It is inconceivable as to how a standard developed by Government of only 34 countries can be accepted by Government of other countries as ‘standard’ of sharing of revenue on international transactions between source and resident country particularly when it only take care of the interest of developed countries and has seriously restricted the taxing powers of source country
Research and Advocacy Organization Recommends Country-by-Country Reporting to Help Curtail Tax Avoidance
Global Financial Integrity (GFI) welcomed an initiative by the OECD’s first Global Forum on Transfer Pricing today to simplify and strengthen international transfer pricing standards, but noted the need to engage a wide variety of developing countries as the Global Forum moves forward with its work.
Transfer pricing, the practice of pricing transactions between entities of the same multinational company, can often be abused by companies to shift their actual profits away from high-tax jurisdictions and recording them in low-tax jurisdictions, thereby minimizing their own tax bill,” said Heather Lowe, GFI’s legal counsel and director of government affairs. “Transfer pricing abuse starves countries—particularly developing countries—of the tax revenue needed to invest in infrastructure, healthcare, and education.
As the Global Forum moves ahead and conducts its planned transfer pricing risk assessment, simplifies the existing transfer pricing rules, and develops its detailed ‘how-to’ manual, it’s crucial that developing nations have a significant voice in the process, added Lowe.
GFI also encouraged the Global Forum to recommend country-by-country reporting—requiring that all multinational corporations report sales, profits, and taxes paid in all jurisdictions in their audited annual reports and tax returns—so that it is easier for tax authorities and the OECD to see anomalies, such as millions of dollars of profit being recorded in “mailbox-only” subsidiaries located in tax havens.
ITAT upholds important transfer pricing principles on characterization and rewards for selling activity
INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD
Date of Pronouncement : 29/02/2012
ITAT that the taxpayer’s UK subsidiary was not merely undertaking marketing activities. The Tribunal held that the UK subsidiary should be characterized as a distributor on the basis of its agreement with the taxpayer, selling efforts, market and credit risks and overall business strategies. Furthermore, the Tribunal held that the reward has to be determined with regard to return on sales rather than a mark-up on value added expenses (marketing and selling expenses).
Tribunal relied on international transfer pricing guidance to determine the appropriate characterization and rewards of a distributor vis-a-vis a mere marketing service provider. In relying inter alia on the distribution agreement to reach its conclusion, the Tribunal has also reiterated an important principle earlier upheld by the Delhi Tribunal in the case of Sony India Pvt. Ltd4. that the contractual terms of an agreement should be given due consideration as long as the terms are consistent with the economic substance of the transaction.
In another recent ruling issued by the Ahmedabad Tribunal in the case of AIA Engineering Ltd., the Tribunal had taken cognizance of inter-company agreements, detailed functions and risks of that taxpayers’ UAE subsidiary to conclude that the subsidiary was a distributor and not merely a marketing service provider.
The above principles have wide applicability to distributors of goods and services. Taxpayers engaged in distribution and sales activities for their group entities should review their facts such as agreements, employee functions, remuneration and business strategies that would be scrutinized to determine their characterization and arm’s length rewards.
The APA provisions are proposed to be implemented in the Indian Income-tax Act, 1961 through the Budget recently presented before the Indian Parliament.
An APA mechanism can be – Unilateral, Bilateral and Multilateral.
A Unilateral APA is the one which is entered into between the tax assessee and government of a country with respect to taxability of particular cross-border transfer pricing transaction(s) in that country.
Since a Unilateral APA does not determine the taxability of the transaction in other country, it does not completely eliminate the risk of double taxation of such transfer pricing transactions.
A Bilateral APA is the agreement entered into between two countries having a Double Tax Avoidance Agreement (‘DTAA’) between them, in accordance with article of Mutual Agreement Procedure therein; with respect to taxability of transfer pricing transactions affecting both.
A Multilateral APA is an extension of Bilateral APA, whereby more than two countries involved in certain transfer pricing transaction(s) – under their respective DTAA with each other – decide on the tax sharing thereof.
Hence, Unilateral APA takes place under the domestic law of a country and Bilateral/Multilateral APA take place per the provisions of the DTAA between countries.
In the above background, it would now be clear that the proposals of APA in Indian Budget 2012-13 are of Unilateral APA. However, it must be appreciated that these would drastically bring down litigation for MNCs with respect to Indian Transfer Pricing matters. The provisions, contained in the proposed section 92CC of the Income-tax Act, 1961, (the Act) provide that the CBDT, with the approval of Central Government, may enter into an APA with any person, determining the arm’s length price or specifying the manner (including the TP Method to be applied) in which the same would be determined, with respect to an international transaction to be entered into by that person.
Such APA shall be binding on the concerned person (assessee) and the tax department with respect to the agreed transaction/s.
Accordingly, the APA provisions proposed shall be ASSESSEE AND TRANSACTION SPECIFIC.
Moreover, the same shall not be binding in case of change in law or facts having bearing on the APA.
It has also be provided that the CBDT, with the approval of Central Government, may declare an APA void ab initio, if it is found that the same has been obtained by fraud or misrepresentation of facts; upon which the provisions of the Act shall apply as if the same was never entered. Also, the period between the date of entering the APA and the declaration of same as void, shall be excluded for computing any period of limitation under the Act, and if the period of limitation after such exclusion happens to be less than 60 days, then the same would be deemed to be extended to 60 days.
It has been further provided that the CBDT may, for this purpose, prescribe a scheme specifying then manner, form, procedure and related matters; which is keenly awaited.
Finally, it is provided that where an APA application is pending before the CBDT, the same shall be deemed as ‘pending proceeding’ for the purpose of the Act.