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International Strategy for Transfer
Pricing Compliance
Samir Gandhi & Bhupendra Kothari
7th March 2015Private and Confidential
For Discussion Purposes Only
©2015 Deloitte Touche Tohmatsu India Private Limited
• Transfer Pricing Regime
• Emerging Issues
• Developments
• Ensuring Global Compliance
Contents
Transfer Pricing Regime
©2015 Deloitte Touche Tohmatsu India Private Limited
Countries where TP Regulations are in existence
Argentina Australia Austria Bangladesh Belgium
Brazil Canada Chile China Colombia
Croatia Czech Republic Denmark Dominican
Republic
Ecuador
Egypt Estonia Finland France Germany
Hong Kong Hungary India Indonesia Ireland
Isarel Italy Japan Kenya Korea, North
Korea, South Latvia Lithuania Luxembourg Malaysia
Mexico Namibia Netherlands New Zealand Norway
Oman Panama Peru Philippines Poland
Portugal Romania Russia Singapore Slovakia
Slovenia South Africa Spain Sweden Switzerland
Taiwan Thailand Turkey United Kingdom United States
Uruguay
Transfer Pricing (“TP”) regulations in the world
4
©2015 Deloitte Touche Tohmatsu India Private Limited
Countries where TP Regulations are still emerging
Algeria Angola Armenia Aruba Belarus
Bolivia Botswana Bulgaria Burkina Faso Cambodia
Cote d'Ivoire Cyprus El Salvador Ethiopia Gambia
Georgia Ghana Greenland Iceland Kazakhstan
Kuwait Liberia Libya Macedonia Malawi
Mali Mauritania Mauritius Mongolia Morocco
Mozambique Netherlands Antilles Nicaragua Nigeria Pakistan
Papua New
Guinean
Qatar Senegal Sierra Leone Sri Lanka
Trinidad and
Tobago
Ukraine Uzbekistan Zimbabwe &
Zambia
TP regulations in the world
5
©2015 Deloitte Touche Tohmatsu India Private Limited
Indian Transfer Pricing Regime
• TP Regulations (“TPR”) enacted in 2001
‒ Broadly based on OECD TP guidelines
‒ Comprehensive legislation including
• Mandatory compliance to maintain “contemporaneous documentation”
• Annual filing of “information form” on intercompany transactions
• Separate cell to carry out Transfer Pricing audits
‒ Increased sophistication of data gathering
‒ Increased resources and training for tax officers
‒ Exchange of information between tax and custom authorities
‒ Aggressive views/positions taken
• Extension of the scope of TP provisions in The Finance Act 2012 to cover Specified
Domestic Transactions (“SDT”)
• Introduction of Advance Pricing Agreement (“APA”) rules in August 2012 and Safe Harbor
Provisions in September 2013
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©2015 Deloitte Touche Tohmatsu India Private Limited
Indian Transfer Pricing Regime – Developments over
couple of years
• Threshold of SDT proposed to be increased from INR 5 crore to INR 20 crore with effect
from Assessment Year 2016-17
• Risk based approach :- CBDT has dropped the 15 crore threshold for referring compulsory
scrutiny of transfer pricing cases and has moved towards adoption of risk based approach
to identify international transactions prone to tax evasion
• Restructuring of the Dispute Resolution Panel (“DRP”) wherein panels shall now
comprise of commissioners stationed at the respective panel locations making them
available all the time
• Introduced the concept of range and use of multiple year data (both yet to be notified)
while determining arm‟s length price of international transactions
• Proposed Amendment of section 6 of the income tax act 1961: A company shall now be
considered to be a resident in India if its Place of Effective Management (“POEM”) is in
India at any time during the relevant Financial Year
• Introduction of roll back provisions in APA
7
Emerging Issues
©2015 Deloitte Touche Tohmatsu India Private Limited
Currently MNCs are facing a number of new challenges, including:
This new global tax environment has resulted in the following actions – a Global Tax
Revolution:
Emerging Issues - Global
Perception that
MNCs are not paying
fair share of taxes
Loss of trust between
tax authorities and
business
Loss of trust between
tax authorities in
different countries
Change in tax
authorities‟
approach to
interpretation
of tax law and
tax treaties
Changing
behaviours of
tax authorities
re tax treaties
and tax laws
OECD‟s
BEPS* project
* Base Erosion and Profit Shifting
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©2015 Deloitte Touche Tohmatsu India Private Limited
Emerging Issues - Global
• Structures that results in no current tax and have the effect of shifting income to a
jurisdiction where no tax is imposed
• More compliance requirements, audits, adjustments and penalties
• Global hot spots
‒ Americas : United States and Canada
‒ EMEA : Germany, France, Denmark
‒ APAC : India, Japan, China
• Business restructurings and Intangibles
• Location savings
• Profit attribution on complex financial industry products
• Guarantee pricing
• No movement of MAP - Disconnect between Competent Authorities
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©2015 Deloitte Touche Tohmatsu India Private Limited
What Tax Authorities are looking at - Americas/EMEA
Canada
• Management fees and royalties
• Tangible goods
• Financial transactions
• Business restructurings
• Cost sharing
Germany
• Intangible, royalty payments
• Relocation of functions
• Recurring loses
• Financing transactions
• Specific industries under focus: Oil, motor
vehicles, pharmaceuticals, distributors,
banking and insurance
USA
• Cost Share Arrangement (“CSA”)
and buy-in payments
• Royalties or management fees
to affiliates
• Inbound companies with recurring losses
• Companies that do not have TP
documentation
UK
• Enquiries into acquisitions, disposals,
reorgs and (of course) tax avoidance
schemes
• Complex structures identified for audits –
audits to be completed within 18 to 36
months
• Enquiries into the extent, nature and
reliability of systems and controls
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©2015 Deloitte Touche Tohmatsu India Private Limited
What Tax Authorities are looking at – India
• Payment for Intangibles
• Intragroup financing – loans and guarantees – conflicting judgments
• Capital financing transactions - Issue of shares
• Transactions with party located in tax haven; notified jurisdiction
• Payment towards royalty
• Location Savings
• Assessment of foreign companies (Mirror transactions)
• Non acceptance of other adjustments – Capacity utilization, Risk adjustments
• High margin adjustment for service companies
• Shared service and HO allocation/ other cost recharges
• Benchmarking directors‟ remuneration in case of SDT
• The assessment of SDT are on round of the corner to begin.
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©2015 Deloitte Touche Tohmatsu India Private Limited
Emerging Issues - India
Case Laws Issues Covered
Bharti Airtel (Delhi ITAT);
Videocon Industries Ltd Vs ACIT
Deleted adjustment on account of guarantee fee;
by upholding that guarantee is not an international
transaction
Watson Pharma (Mumbai ITAT) Held that where the operating margin earned by a
taxpayer is at arm‟s length based on local market
comparables operating in similar economic
conditions as that of the taxpayer, and the taxpayer
and AE operate in a perfectly competitive business
environment, any further return on account of
location savings is not permissible
Vodafone India Services Private Limited (Bombay
High Court)
Held that issue of shares at a premium by
assessee in favor of its Associated Enterprise did
not give rise to any income from international
transaction and there is no need to invoke TP
provisions
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©2015 Deloitte Touche Tohmatsu India Private Limited
• Nine years of TP audit completed – trends indicate greater scrutiny, ever increasing
adjustments and resultant litigation
• Increased resources and training for tax officers
• Trends of TP adjustment:
Indian TP Landscape
Intensity and magnitude of TP audits in India is increasing with every passing year!!
Assessment
Year
TP Audit
Year
No. of TP Audits
completed
No. of adjusted
cases
Cases adjusted
(%)
Estimated addition
(INR Crores)
2002-03 2005-06 1,061 239 23% 1,220
2003-04 2006-07 1,501 337 22% 2,287
2004-05 2007-08 1,768 471 27% 3,432
2005-06 2008-09 1,945 754 39% 7,754
2006-07 2009-10 1,830 813 44% 10,908
2007-08 2010-11 2,368 1,207 ~51% 24,111
2008-09 2011-12 2,638 1,343 ~51% 44,532
2009-10 2012-13 3,171 1,686 ~53% 70,016
2010-11 2013-14 3,617 1,920 ~53% 59,602
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Developments
©2015 Deloitte Touche Tohmatsu India Private Limited
Global TP Trends
• The Inland Revenue Authority of Singapore (“IRAS”) on 6th January, 2015 released
revised TP guidelines
- Comprehensive guidelines to replace TP guidelines issued in 2006;
- Requirement of TP documentation on contemporaneous basis.
• The Finance Bill 2015 of France increases penalties for failure to comply with TP
documentation rules
• Australian tax office (“ATO”) on 12th November, 2014 issued guidance on Australia‟s
new TP „Reconstruction provisions‟
• The ATO recently released an important package of guidance dealing with TP
documentation, administration of TP Penalties, and TP record keeping
• TP provisions in Bangladesh effective from 1st July, 2014 require taxpayers to comply
with contemporaneous TP documentation requirements for cross border transactions
with associated enterprises
• Renewed dialogue started between India and US competent authority
- Welcome change given the earlier broken process
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©2015 Deloitte Touche Tohmatsu India Private Limited
Introduction to BEPS
• 19 July 2013: OECD released its Action Plan in regard to Base Erosion and Profit Shifting
(BEPS), to coincide with the G20 Finance Leaders meeting in Moscow
• Action Plan:
‒ Is ambitious : it consists of 15 specific actions “to prevent corporations from paying
little or no tax” (OECD press release)
‒ Is consensus-based : it has been “signed off” (at the political level) by all 34 OECD
member countries and the 8 G20 countries which are not OECD members
‒ Has a relatively short timetable : all actions are to be completed by December 2015
(with many of the actions having earlier deadlines)
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©2015 Deloitte Touche Tohmatsu India Private Limited
BEPS Action Plan: Overview
Action 1:
Address the tax challenges of the digital economy
“Gaps” “Frictions” “Transparency”
i. Establishing international
coherence of corporate
income taxation
ii. Restoring the full effects and
benefits of international
standards
iii. Ensuring transparency while
promoting increased certainty and
predictability
Action 2:
Neutralize the effects of hybrid
mismatch arrangements
Action 6:
Prevent treaty abuse
Action 11:
Establish methodologies to collect and
analyze data on BEPS and the actions
to address it
Action 3:
Strengthen controlled foreign
company (CFC) rules
Action 7:
Prevent the artificial avoidance of
PE status
Action 12:
Require taxpayers to disclose their
aggressive tax planning arrangements
Action 4:
Limit base erosion via interest
deductions and other financial
payments
Assure that
transfer
pricing
outcomes
are in line
with value
creation
Action 8:
Intangibles
Action 13:
Re-examine transfer pricing
documentationAction 9:
Risk and capitalAction 5:
Counter harmful tax practices
more effectively, taking into
account transparency and
substance
Action 14:
Make dispute resolution mechanisms
more effective Action 10:
Other high-risk
transactions
Action 15: Develop a multilateral instrument
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©2015 Deloitte Touche Tohmatsu India Private Limited
OECD moving fast….
• Guidance on implementation of Transfer Pricing documentation andCountry – by – Country (“CbC”) reporting
6th February,2015
• Guidance on Transfer Pricing documentation and Country – by – Country reporting
• Guidance on Transfer Pricing Aspects of Intangibles
16th September, 2014
• Over 330 senior tax officials from more than 110 jurisdictions and internationalorganizations met in Paris during the 3rd Annual Meeting of the Global Forumon Transfer Pricing. The meeting was especially targeted at discussingsolutions to BEPS and participants discussed the challenges faced bydeveloping countries in targeting BEPS.
26-28 March 2014
• Paper on TP comparability data and developing countries released forcomment – written comments / suggestions to be submitted by 11 April 2014
11 March 2014
• Discussion Draft on TP documentation and country-by-country reportingreleased for public comment – comments received published on 3 March2014
30 January 2014
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©2015 Deloitte Touche Tohmatsu India Private Limited
CbC ReportingNew guidelines adopt 3-tiered approach
Country-by-CountryTemplate
• Key financial information on all group members on an aggregate country basis with an activity code for each member
Master File
• Key information about the group's global operations including ahigh-level overview of a company’s business operations along with important information on a company’s global TP policies with respect to intangibles and financing
Local File
• Information and support of the intercompany transactions that the local company engages in with related parties
Local law will determine the language in which the documentation must be submitted.
Countries are encouraged to permit filing in commonly used languages and request
translation after submission.
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©2015 Deloitte Touche Tohmatsu India Private Limited
Master File & Local File (content and interrelation)
© 2014 Deloitte Tax & Consulting
Master File
1. Organizational Structure
• Chart with Group legal & ownership structure and geographical
location of operating entities
2. Description of the Group’s Business(es)
• Important drivers of business profits
• Description of important business restructuring transactions
• Description of supply chain for 5 largest products / services
• List and brief description of important group service arrangements
• Brief functional analysis describing the principal contributions to
value creation by individual group entities
4. Group Intercompany Financial Activities
• Group‟s financing arrangements and related TP policies
• Identification of central financing entities
5. Group’s Financial & Tax Positions
• List of relevant APAs and tax rulings relating to the allocation of
income among countries
• Annual consolidated financial statement
1. Local Entity
• Local organization chart and management structure
Local File
• Detailed description of the business and business strategy
pursued (including business restructurings or intangible transfers)
• List of key competitors
2. Controlled Transactions (not exhaustive)
• Amount of intra-group payments and receipts involving the local entities
broken down by jurisdiction of the foreign payer / recipient
• List of associated enterprises involved in controlled transactions and
relationships
• Detailed comparability & functional analysis with copies of all material
intercompany agreements
• Indication of the most appropriate TP method selected
• List and description of selected comparable uncontrolled transactions
relied on in the TP analysis and possible adjustments performed
• Copy of APAs or tax rulings to which local tax jurisdiction is not a party
but impacting relevant controlled transactions
3. Group’s Intangibles
• Description of the overall strategy for development and exploitation
of intangibles including Group TP policies re R&D and intangibles
• List of important Group intangibles with the list of (a) entities legally
owning them and (b) important intragroup agreements
• Important transfers of interests in intangibles within the Group
3. Financial Information
• Annual local entity financial accounts
• Information and allocation schedules showing link between financial
data used in TP method and annual financial statements
• Summary schedules and sources of relevant financial data for
comparables used
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©2015 Deloitte Touche Tohmatsu India Private Limited
Information/ documents required under Rule 10D
Rule Information/ documents
10D (1) (a) Ownership structure of the taxpayer
10D (1) (b) Profile of the multinational group
10D (1) (c) Broad description of the business and industry
10D (1) (d) Details of intra-group transactions
10D (1) (e) Function, assets and risks analysis
10D (1) (f)Supporting documents for the inter-company transactions such as agreements, official publications, reports, studies, market quotations, results of market research, letters in respect of negotiations, etc.
10D (1) (g)
Comparability analysis, including description and reason for selection of a particular TP method, alongwith the record of actual working carried out to determine the arm‟s length price
10D (1) (h)
10D (1) (i)
10D (1) (j)
10D (1) (k)Assumptions, polices and price negotiations, if any, which have critically affected the determination of the arm‟s length price
10D (1) (l) Details of adjustment made to transfer prices to align them with arm‟s length price, if any
10D (1) (m) Any other information/ document relevant to the determination of arm‟s length price
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©2015 Deloitte Touche Tohmatsu India Private Limited
Master File compared with Rule 10D
Constituents of Master File Presence in Rule 10D
Organizational structure of the MNCBroadly covered under Rule 10D (1) (a), Rule 10D (1) (b) and Rule 10D (1) (c)
Description of MNC‟s business
MNC‟s intangibleNot specifically covered under Rule 10D, however, intangibles relating to the Indian operations are required to be described under Rule 10D (1) (e)
MNC‟s inter-company financial activities Not covered under Rule 10D
MNC‟s financial and tax position Not covered under Rule 10D
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©2015 Deloitte Touche Tohmatsu India Private Limited
Local File compared with Rule 10D
Constituents of Local File Presence in Rule 10D
Information relating to local entity Broadly covered under Rule 10D (1) (a), Rule 10D (1) (b) and Rule 10D (1) (c)
Information relating to controlled transactions of the local entity Covered under Rule 10D (1) (d) to Rule 10D (1) (m) -
except details relating to unilateral/ bilateral APAs and similar rulings
Financial information of the local entity
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©2015 Deloitte Touche Tohmatsu India Private Limited
CbC Reporting
Recent OECD Guidance on CbC Reporting Implementation
• The guidance on the implementation of TP documentation and CbC reporting answers to
taxpayers‟ questions regarding the:
− timing of preparation and filing of the CbC report
− which companies will be subject to the reporting requirements
− the use of the CbC report by jurisdictions
− the mechanisms for government-to-government exchange of CbC reports
Key Considerations/ Implications
• Presents organized view of where the MNC earns income and pays taxes
• Presents where people and assets are located in relation to the income earned and taxes
paid
− High priority for countries that cannot get information under current rules
− Intended for risk assessment
• Will template result in
− Value chain analysis with people and tangible assets as the driver?
− Greater use of profit splits?
− Increased emphasis on Location Specific Advantages?
− Profit comparison between countries with similar functional and risk profile?
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©2015 Deloitte Touche Tohmatsu India Private Limited
BEPS Scorecard for India
Interestingly, India has not reacted officially so far or provided its comments on BEPS
though it has signed off on the same being an OECD non-member country
Current legislative position
• There have been no changes in tax laws specifically
related to BEPS
• GAAR provisions: new rules have been introduced,
However applicability of the same is deferred to 2
years
Perspective of Government
• The Indian government has not indicated their attitude on
specific action points though speeches, interviews or
draft budget proposals
Perspective of the public• There is definitely a sense of awareness with the public
in general; all actions are being closely followed
Unilateral BEPS actions• No clear signs of tougher BEPS views during tax audits
or litigation
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©2015 Deloitte Touche Tohmatsu India Private Limited
RPTs to be at Arm‟s Length
New RPTs and modification of existing RPTs
require prior Audit Committee approval
Material RPTs to be disclosed in the
Board‟s Report
Key Implications: RPT Provisions
(Companies Act, 2013)
Prior approval of Board for RPTs that are not
ALP/Ordinary Course of Business (“OCB”)
Prior approval of shareholders for RPTs that are not
ALP/OCB and exceeding specified threshold
Arm’s Length Price in India – Companies Act 2013
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©2015 Deloitte Touche Tohmatsu India Private Limited
Arm’s Length Price in India – Companies Act 2013
As per explanation (b) to section 188 of 2013 Act, the expression “arm‟s length transaction
means transaction between two related parties that is conducted as if they were unrelated so
that there is no conflict of interest
No specific guidance provided by 2013 Act as regards the application of the term “arm‟s length
transaction”
While interpreting the definition, it would be pertinent to keep in perspective the objective of
2013 Act that has laid emphasis on corporate governance:
‒ Aim is to protect the interest of the company and its shareholders
‒ Enhancing self–regulation
‒ Ensure that there is no prejudice to shareholder of either of the parties to the transaction and
that such transactions do not result in misstatements of accounts
• Having regard to the above, it may be vital to demonstrate the commercial expediency of a
transaction along with that the underlying contract does not result into a conflict of interest
between the two parties
• Further, it is important to maintain consistency in concluding arm’s length price for a
transaction from both Companies Act and TP perspective
28
Ensuring Global Compliance
©2015 Deloitte Touche Tohmatsu India Private Limited
Compliance Issues
Compliance Issues
Penalties
Confidentiality
Other Issues
Contemporane-ous
Documentation
TimeframeMateriality
Retention of Documents
Frequency of Documentation
Updates
Language
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©2015 Deloitte Touche Tohmatsu India Private Limited
Compliance Issues
Differing Substantive TP Rules
Differing TP Documentation Rules
Differing Administrative Approaches
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©2015 Deloitte Touche Tohmatsu India Private Limited
TP Documentation
Basic need for multi-country compliance
Significance of Documentation
• Is generally a part of legal regulations
• Enables discharge of burden of proof
• Indispensable in multiple audits
• Protection against penalty
Supporting documents
• Inter-company agreements
• Evidence(s) of business reasons i.e. limited risks, market penetration etc, used to negotiate or set TP
• Documents generated as daily business processes
• Trail of negotiations with Associated Enterprise e.g. mail trail documenting reasons for price fluctuations
• Segmental / transactional profitability
A Robust TP Global Policy Report
• Analyses functions, assets & risks in the
context of business model
• Considers alternate arguments / positions
• In sync with website/public information
• Evidences global consistency
OECD recent guidance on TP documentation and country-by-country reporting (master file / local file)
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©2015 Deloitte Touche Tohmatsu India Private Limited
Why take the effort
Commercially Realistic
Less than Commercially
Realistic
Returns Consistently
Losses
Very High
Low
Medium
Low to Medium
High
Medium to High
High quality of process and documentation
Low quality of process and documentation
Risk of Audit of Transfer
Pricing Outcomes
Profitability Level
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©2015 Deloitte Touche Tohmatsu India Private Limited
Why take the effort
• To avoid penalties
• To be prepared for a TP examination
• As a contemporaneous record
• To present data and decisions in the best light
• To demonstrate how these decisions were made
• To show that you searched for independent comparables
While documentation, whether global, regional, or local, is required as a compliance tool, it is
also an asset to, and a planning vehicle for, a multinational, as well as a guideline for a review
of its financial performance by one or more tax authorities.
Multinationals should consider their documentation not as something routine and
standardized, but rather as a protective tool requiring careful analysis and judgment.
prepared, it can save the multinational significant tax dollars, internal headaches, and
compliance costs.
34
Questions
©2015 Deloitte Touche Tohmatsu India Private Limited
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