INVESTMENT BANKING

Countries all over the world are applying greater scrutiny – and calling for tightened regulations – on transfer pricing rules. However, the many complexities of transfer pricing provide a variety of opportunities to optimize profits, increase cash flows, and make effective arrangements for your international transactions.

As Revenue Authorities across the globe tighten their Transfer Pricing (TP) Regulations, Multinational Enterprises (MNEs) seem increasingly vulnerable to transfer pricing adjustments that may lead to an increase in overall tax cost to the group.

Tax heads of MNEs need to keep abreast of the dynamics of TP Regulations across all jurisdictions, enable compliance in each such jurisdiction and adopt an appropriate risk mitigation strategy. The absence of information in the public domain regarding Industry best practices, further complicates matters.

NR Professionals (NRP) India’s Transfer Pricing Practice, consisting of key office bearers who specialize in the subject, handle complex advisory and structuring assignments that mandate coverage of multiple Tax Jurisdictions across the world. Aided by dedicated practitioners around the NRP India’s network, the transfer pricing services offered include a range of planning, compliance and benchmarking services. We can work with you to develop transfer pricing policies that are defensible, flexible and in line with your overall tax planning strategies.

1. Determination of Arm’s Length Price

An international transaction can be in the nature of a purchase, sale, or lease of property or provision of services, lending or borrowing money, and any other transaction that has bearing on profits, income, losses, or assets and includes cost contribution arrangements.

Section 92B also provides that a transaction between an enterprise and an unrelated third party (whether based in India or overseas) shall be deemed to be an international transaction if there exists a prior agreement between an AE and the third party.

Furthermore, if the terms of such transactions with the unrelated party are determined by the AE, such a transaction too will be deemed as an international transaction. As a result, these transactions will also be governed by transfer pricing regulations in India.

Arm’s-length price, as defined by section 92F, means a price that is applied to transactions between persons other than AEs in uncontrolled conditions. Section 92C prescribes methods for the determination of the arm’s-length price and provides that such a price will be calculated using the most appropriate method.

Main ingredients of Arm’s Length Price;

1. The price should be applied or proposed to be applied in a transaction.
2. A transaction will be between two unrelated or persons; and
3. The transaction should be in uncontrolled conditions.

Under Companies Act, 2013 define Arm’s Length Transactions for the purpose of Section 188(1), the expression Arm’s Length Transaction means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

Under Income Tax Act, 1961 Section 92F define Arm’s Length Price is the price applied (or proposed to be applied) when two unrelated persons enter into a transaction in uncontrolled conditions.

Unrelated Persons (not associated enterprise-AE); Section 92A, the persons said to be unrelated if they are not associated or deemed to be associated enterprise.

Uncontrolled Conditions; are that conditions which are not controlled or suppressed or moulded for achievement of a predetermined results.

Methods of Computation of Arm’s Length Price Section 92C
Arm’s Length Price can be computed by the following methods;

1. Comparable Uncontrolled Price Method;
2. Resale Price Method;
3. Cost Plus Method;
4. Profit Split Method;
5. Transaction Net Margin Method;
6. Such other methods as may be prescribed by the board.

2. TP Planning, Documentation and assistance with compliance

This entails developing TP strategies and providing assistance in meeting documentation and compliance requirements by assisting in the preparation of contemporaneous documentation in a timely manner, as required under the Indian TP regulations. In addition, it involves reviewing existing documentation and/or global documentation from an Indian TP perspective. Further, to ensure compliance, we can assist clients in preparing guidelines and procedures to keep their documentation up to date.

Detailed description
As tax jurisdictions expand their legislation, rulings, and enforcement efforts, an effective and flexible TP strategy must be global and sufficiently flexible to adapt as your business develops.

TP Planning

NRP in India’s GTPS practice assists companies in their TP planning in the following ways:

• Help multinationals develop and implement commercially feasible and fiscally efficient TP policies
• Assisting companies in modifying existing policies to reflect changes in the local law or business circumstances and assessing the potential impact of TP policies on their overall tax position
• Assisting multinationals translate their TP policies into transaction-level prices, reconcile TP and customs requirements and automate TP calculations
• Assisting companies in testing and reporting transfer prices, and developing processes and tools to monitor TP results.

Documentation and assistance in compliance:
India’s TP regulations prescribe rigorous mandatory documentation requirements and impose steep penalties in case of non-compliance. Thus, multinationals need to ensure they comply with documentation and compliance requirements and also ensure that a system is in place for future compliances. KPMG in India’s GTPS team can help you meet your documentation and compliance requirements through the following ways:

• Assisting you in the preparation of contemporaneous documentation in a timely manner as required under the Indian TP regulations
• Reviewing your existing documentation
• To confirm that your company remains compliant in the future, we can assist you in preparing guidelines and procedures for keeping your documentation up to date.

3. Value Chain Managment

This entails helping companies integrate tax planning into business operations to help maximize growth opportunities, minimize expenses and risk, enhance return on investment, and drive efficiencies across operations.

Detailed description:

Value chain management services can help ensure that a company integrates tax considerations into business process changes to improve the operational efficiency and facilitate effective tax management. It helps MNEs realign their functions, assets and risks with such changes in the supply chain, thereby helping to foster a reduction in the effective tax rate. The strategy is tailored to the specifics of the MNE’s business, allowing the flexibility of change at any particular time.

Leveraging with the GTPS network, NRP in India adopts a multidisciplinary approach, wherein our tax and business advisory professionals provide coordinated services. Drawing upon our global tax knowledge, industry experience, and cross-functional approach, we bring a keen understanding of the tax and TP issues that might affect a multinational organization and the ability to help shape the supply chain to meet the total business objectives. The team includes economists and industry specialists who can provide innovative and well-defined strategies for each function in the supply chain.

4. Base Erosion and Profit Shifting

We can assist in determining the overall strategy of the MNE group in light of the BEPS provisions and assist with the new compliance requirements arising as a result of such projects. In addition, we can also assist in analysing various intangibles and determine whether group members contributing towards the development, enhancement, maintenance, protection and exploitation of intangibles are being remunerated appropriately in line with the Significant People’s Functions (SPFs) being performed. Further, we can also assist in performing a diagnostic review to evaluate the company’s readiness and preparedness in respect of TP compliance obligations and equip the group to meet the documentation deadlines and help ensure that there is alignment between the local and global documentation.

Detailed description
On the request of the G20 finance ministers, the Organization for Economic Co-operation and Development (“OECD”) launched an Action Plan on BEPS in July 2013. The action plan through its various reports and recommendations proposed a new set of standards to prevent BEPS and to equip governments with domestic and international instruments to prevent corporations from paying little or no taxes. India is actively involved in the BEPS project in alliance with the OECD and G20 member countries, and is keen to implement and make changes to domestic law to ensure parity with BEPS recommendations.

BEPS – TP action points
Intangibles:
Based on the BEPS recommendations, an in-depth scrutiny by the tax authorities worldwide is likely on transactions involving intangibles. Tax authorities are likely to draw inference and support from OECD/BEPS guidelines in determining the return from intangibles. It is therefore essential to analyse how the various Intellectual Property Rights (IPRs), brands, etc. are positioned and whether all group members contributing towards the development, enhancement, maintenance, and the protection and exploitation of intangibles, are being remunerated appropriately. and also for determining :

• Location of IPRs vs place of conceptualization and development of such IPRs
• Legal ownership vs beneficial ownership of intangibles and related payments.

Three tier TP Documentation including a Country-by-Country (CbyC) reporting:
One of the most important action plans pertaining to transparency is the three-tier TP documentation structure recommended by the OECD for MNEs resident in member and G20 countries.

The three-tier documentation structure:

• Applies to all MNEs whose ultimate parent is a resident of OECD/G8/G20 countries
• Requires providing an overview of the MNE’s global value chain
• Identifies if revenues and profits generated in all jurisdictions are commensurate with substance
• Detects artificial shifting of substantial amounts of income into tax-advantageous environments by an automatic exchange of information between the tax authorities
• Recognizes where groups are located in tax havens or enjoy tax incentives
• Provides transparency on the authenticity of functions, assets and risks of MNEs’ operations.
Each MNE having intercompany transactions with their group companies would be required to prepare :
• Master file to provide the MNE’s blueprint
• Local file to provide material TP positions of the local entity/taxpayer with its foreign affiliates; and
• CbyC Report to provide jurisdiction-wise information.

OECD has released detailed implementation guidelines which India is expected to adopt. It is therefore necessary for the relevant groups/companies to realign their functions and pricing strategies to ensure that profit/income is allocated in accordance with the value creation in each jurisdiction. Companies operating in India, especially Indian headquartered companies need to tie up the functional analysis of their Indian operations vis-à-vis their global operations.

GTPS’s teams across jurisdictions can help you:

• Conduct knowledge sharing sessions to increase awareness on the requirements of the three-tier TP documentation structure and identify new compliance requirements
• Perform a diagnostic review to assist you to evaluate your readiness and preparedness in respect of TP compliance obligations
• Analyze intangibles in light of BEPS guidance and determine whether all group members contributing towards the development, enhancement, maintenance, protection and exploitation of intangibles, are being remunerated appropriately
• Develop processes and procedures for compliance and equip the group to meet the documentation deadlines and ensure that there is an alignment between the local and global documentation.

5. Domestic Transfer Pricing

Assistance in compliance with Domestic TP provisions as introduced by the Finance Act, 2012, which extends the application of existing TP regulations for international transactions to certain domestic transactions defined as
“Specified Domestic Transactions” with effect from Financial Year 2012-13.

Detailed description
The Finance Act, 2012 extended the application of existing TP regulations for international transactions to certain domestic transactions defined as “Specified Domestic Transactions” (“SDT”) with effect from Financial Year 2012-13. These regulations become applicable where the aggregate amount of all such domestic transactions exceeds INR 200 million in a financial year. Accordingly, taxpayers need to appropriately structure their TP policies based on a sound business rationale and commercial substance, and maintain robust underlying documentation to enable them to justify to the revenue authorities the transfer prices in respect of the SDTs at the time of audits.

NRP’s GTPS team can help you meet your documentation and compliance needs through the following ways:

1. Help with identifying specific related parties and consequent SDTs emanating between them which would fall within the purview of domestic TP provisions
2. Help in conducting a thorough functional and benchmarking analysis in respect of the SDTs
3. Assist in developing and implementing commercially sensible and fiscally efficient TP policies
4. Assist in preparing contemporaneous documentation in a timely manner as required under the Indian TP regulations in respect of such SDTs.