Looking at current state of affairs in India, the dream of becoming a 5 trillion economy by 2025 looks like a steep climbing. As a country we need to take multiple steps in one direction that leads to improving the sentiments of the globe towards Indian economy. In the same context, we have identified few steps that India should take on Transfer Pricing front so that it can give signals to global multinationals that Doing business in India is becoming easier day by day and there are more benefits than ever to conduct significant business activities from India, rather than looking at India as just a market.
India's transfer pricing journey has been a roller coaster ride since beginning, it has seen its own ups and downs. In the initial years, transfer pricing adjustments were made on every possible issue that could have been thought of, sending a signal globally that India wants to protect its tax base at any cost. The later years saw, globalisation of transfer pricing regulations with introduction of Safe Harbour, DRP, APA, MAP, Secondary Adjustments, CbCR, Master File etc.
On one hand India is wanting to become the global manufacturing hub, boost start-up culture, attract more and more foreign investments and on another hand, it is struggling in view of significant backlog of pending litigation, fear in the minds of businesses due to economic and legal uncertainty etc. While much has already been done to bring global best practices to India, but with passage of time, it is important to have a relook and see if there are any gaps that can be filled.
We will talk about how few measures that can make difference and help India overcome the above challenges and act as a catalyst to drive growth and investments:
1) Revamping APA and safe harbour regulations
As per latest annual report on APA released by CBDT for FY 2018-19, India has signed 271 APAs out of 1155 applications received till 31 March 2019. India APA programme is considered to be one of the most successful APA programmes in world but the number of taxpayers applying for APA still form a fraction of total taxpayers to whom TP provisions apply. Long drawn process and significant costs can be considered as two of the major factors limiting the number of applicants going for APA. We have three recommendations, which can help in giving a boost to quick resolution of APAs and also aid in increased participation:
(i) Introduction of SME APAs
Countries like USA and Netherlands have a specific APA program for small and medium taxpayers. These taxpayers are identified on the basis of revenue, value of intra group transactions, level of economic activity, headcount etc. The SME APA would typically have less application fees as compared to fees for normal APAs (normally half of normal APA), which would incentivise SMEs to opt for APA. These APAs would tend to be less complex and hence, a separate team can be deployed by revenue to deal with such matters. This would reduce the burden of existing team and at the same time provide certainty to various small and medium size corporations.
(ii) APA based safe harbour rules
India has signed significant number of APAs and as the number increases, it is likely that for most issues, the APA authorities would have finalised position/view/benchmarks. On the other hands, the safe harbour regulations, which despite being revised earlier to lower margins have not been able to attract taxpayers, as they are still deemed as on a higher side. In order to attract more and more taxpayers opt for simpler scheme like Safe Harbour, which would save significant time of the revenue authorities, the CBDT may want to further rationalise the safe harbour regulations nearer to the margins agreed in APAs. This can even be done for taxpayers who are below certain size/scale.
(iii) Safe Harbour for Contract Manufacturing - 'Make in India'
In July 2019, the government presented an interim budget and the highlight of the budget was introduction of 15% tax rate for companies setting up new manufacturing units. It was expected that the rate change would bring in significant capital expenditure in the economy as corporates would find 15% tax rate effective enough to set -up new establishments. As an icing on the cake, if the government comes out with a very attractive safe harbour for contract manufacturers, it is likely that most MNCs would be tempted to shift their manufacturing base to India. This can help government boost 'make in India' and support in increasing the employment opportunities.
2) Overhaul Litigation
Pending litigation has been a huge challenge for the governments and despite various efforts to bring about alternate dispute resolution mechanisms, the list of pending cases seems to be more or less static. In recent past, the government has increased thresholds for tax department to file an appeal at various forums to reduce the pendency of not so material cases, which is a welcome move. Also, CBDT has completely overhauled the assessment experience by making it online, this surely will go long way in curbing unethical practices and would also ensure that the tax officers act independently on the subject matter.
Significant litigation on transfer pricing matters has been a concern for many multinational operating in/from India over the years. Most global CEOs have 'tax certainty' as one of the key concerns while considering investment proposals. Hence, we feel that Budget 2020 should have few proposals with 'tax certainty' being the key theme to provide comfort to the investors. Following are few recommendations in the same regard:
(i) Industry wise risk assessment criteria
In 2019, Australia introduced practical compliance guideline to assess transfer pricing risk of pertaining to inbound distribution arrangement of specific sectors. These guidelines categorize distributors based on their industry, functions, risk profile etc. and indicates audit risks for each category based on range of margins for each category. The guideline indicates that taxpayers falling in low risk category would generally not be assessed for transfer pricing compliance risks and the tax office would be open to early engagement APA discussions. The risk of assessment and its vigor increases as taxpayer moves to higher risk categories.
Similar guidelines, if issued by CBDT would provide early hand estimation of audit risk to the taxpayers to a range of taxpayers operating in various categories such as contract manufacturing, distribution, captive service providers etc. Also, a taxpayer would be able to evaluate approaching CBDT for APAs, if they are falling in high risk category but still feel that their margins are justified in view of peculiar business aspects. These margins can be updated in cycle of every 3 to 5 years.
(ii) Practical guidance/Position papers
In today's uncertain time, every taxpayer prefers certainty towards its tax costs as the tax costs have potential to impact the business significantly and tax compliance is even seen as indicator of morality in public scrutiny.
Tax offices in most of the developed nations have time to time come out with position papers/practical guidance on various issues which have passed the legal scrutiny and/or have been subject matter of significant debate. These position papers typically provide position or view of tax department on various issues. Such papers act as guidance for practical application and allows taxpayers to assess risks before entering in any arrangement.
The CBDT should also identify various issues faced by the taxpayers and release position papers on the common issues to begin with and then cover industry specific issues. To achieve the above, CBDT should form a centre of excellence, which identifies prevailing issues and prepares position of tax office on the same factoring legal provisions, global and domestic jurisprudence etc. These papers would act like advance rulings to taxpayers and tax officers, without getting into facts of each case. These position papers have potential to drive the taxpayers towards following/adopting the suggested positions and would lead to reduction in litigation and position India tax department as a proactive regime.
(iii) Block Assessments
Currently taxpayers are assessed on annual basis, which not only creates significant administrative burden on taxpayer and tax officers but also impacts the quality of the scrutiny. Most advance countries follow block assessment process, where taxpayers are assessed for transfer pricing matters once in 3 or 5 years. There are many benefits of moving to block assessments, for example - There are many businesses where due to the nature of business as such, the profit margins improve year on year basis and in initial years, the outcome may not be comforting to tax officers. Secondly, audit on annual basis does not provide tax officers sufficient time to enquire about actual functions carried out by the taxpayer and they have no choice but to rely on the submissions made, without making detailed enquiries. Block assessment would improve quality of assessment and would also help taxpayers in saving significant time and money currently spent on following same process every year.
We believe that the above changes have potential to attract more business and clear the clouds of uncertainty relating to transfer pricing matters. At a time when the entire world is looking at Budget 2020 with great amount of zest, it would be interesting to see how the finance minister is taking steps that are able to meet the expectations. Budget 2020 should define path for revival of economy and showcase that India is determined to become 5 trillion economy by 2025.
"Great things are not done by impulse, but by a series of a
small things brought together"- Vincent Van Gogh
Note: The views expressed are personal.