Avoiding double trouble in transfer pricing
Late last month, Parthasarathi Shome, economic advisor to the finance
minister, stated that tax laws should not be applied retrospectively
as a measure to generate revenue.
"There are three conditions under which retrospective taxation can be
envisaged," he said at an Assocham conference. " One is to clarify,
one is to correct for mistakes and the third one is to really address
a very egregious tax structure." Dr Shome has been engaging with
industry representatives to understand their concerns to ease the
administrative challenges taxpayers face. It is obvious that taxpayers
who do not follow the arm's- length standard in transfer pricing (TP)
– the pricing of transactions between group companies in different
countries – need to be penalised suitably for non- compliance. Given,
however, the subjectivity involved in TP, tax authorities need to take
a magnanimous view in assessing these issues.
It is easy to disagree with the taxpayer on qualitative parameters
such as the selection of comparables, allowing adjustments for
differences in risks and so on. Transfer pricing is an inexact
science, so interpreting it can lead to multiple conclusions from the
same set of facts and, therefore, create controversy.
But this is one issue India must address to build investor confidence.
Taxpayers find other tax jurisdictions in South East Asia more
supportive and flexible and less adversarial. To compete with these
jurisdictions for information technology (IT) and IT- enabled
businesses, India also needs to adopt a non- adversarial tax
administration policy.
Globally, TP administrations fall in one of three categories: passive/
non- existent policies; aggressive/ evolving policies; and
experienced/ stable policies. India needs to move to a regime with
stable policies to make investors comfortable.
Largely, governments frame their TP administration policies based on
their positions on the following three principles: [1]clarity and
certainty in TP policy; [1]non- adversarial assessment rather than
enforcement; and [1]efficient dispute resolution.
Certainty in policy: Certainty is a scarce commodity in a dynamic
business environment, so businesses tend to focus on jurisdictions
that can at least assure them stable tax and TP policies. Businesses
have restructured their supply chains and inter- company transactions
to favour those administrations that provide for tax benefits as well
as certainty on the amount of tax to be paid. In India, recent safe
harbour rules and the Advance Pricing Agreement (APA) programme have
been welcomed because they provide clarity and certainty to taxpayers.
However, retrospective amendments in the laws challenge the basic
tenet of consistent tax policies and place businesses in a precarious
position. There have been a set of retrospective changes in the TP
rules in the Finance Act, 2012, and such material clarifications
should have been prospective rather than retrospective.
Certainty in TP practices needs to be demonstrated both in the law as
well as in TP audits and enforcement. Further, a method of sharing
position papers internally with industry could help bring about
consistency in approach across the country. For example, certain
transfer pricing officers ( TPOs) allow working capital adjustments
and some may not.
Non- adversarial assessment: TPOs may also be eager to make TP
adjustments that are often frivolous since they do not care about the
sustainability of the matter in litigation.
That is because the TPO is not accountable for the ultimate outcome,
so he has ashort- term view of tax collection. The outcome may be
healthier if the TPOs are provided guidance and position papers.
Companies pursuing an APA programme need comfort that the TPO will not
summarily reject the agreement.
Similarly, companies opting for safe harbour rules expect their claim
not to be rejected without a strong reason and it is important for the
tax administration to display a collaborative approach in dealing with
these matters. The APA programme has proven a brilliant experiment and
the authorities' collaborative approach is providing taxpayers a lot
of confidence. TP audits also need to follow this approach.
Dispute resolution: Globally, most countries are aggressively
targeting multinationals to help tax recoveries in their slow- moving
economies. Given the subjectivity of TP, this area of controversy has
been a low- hanging fruit. The existence of all kinds of anti-
avoidance measures ( such as the General AntiAvoidance Rules,
Controlled Foreign Corporation rules, and so on) are seen as
acornerstone of an effective TP and tax policy that would help the
government mop up the extra revenue it needs to keep the economic
engine running. Many tax administrators have reinforced their anti-
avoidance laws and stepped up scrutiny of inter- company transactions.
As a result of such stringent measures, however, many multinationals
have had to face double taxation. In many cases, foreign companies
have been asked to pay taxes on income that is already included in the
tax base of their subsidiaries in the host countries. This economic
double taxation of taxpayers' profits has been a bone of contention in
all TP disputes and is against the ethos of the double tax avoidance
agreements. India does entertain a Mutual Agreement Procedure ( MAP)
for TP dispute resolutions with some countries where there is a double
tax treaty. However, the country has taken avery aggressive view on
the admissibility of MAP for countries in which the treaty does not
contain paragraph ( 2) in the Article on Associated Enterprises.
Globally, tax authorities would entertain aMAP even with countries
where the Associated Enterprise article does not have the second
paragraph. In fact, India is an outlier in this regard and has blocked
dispute resolution options for a bunch of taxpayers from Korea,
France, Germany and Singapore. It needs to dilute its position and try
to eliminate economic double taxation for taxpayers.
Further, India needs to beef up its dispute resolutions mechanism by
empowering the Dispute Resolution Panel ( DRP) to settle disputes. The
DRP could have an independent chairperson (a retired judge of the
income tax appellate tribunal or a high court) who can take the
decisions for settlement. On their part, taxpayers need a forum that
can moderate the TPO's order and waive penalties. This could ease
taxpayers' pains since they may be able to resolve their disputes more
efficiently.
An effective tax administration that provides the taxpayer easy access
to contest an action by lower tax authorities in a court of law
without having to pay a huge sum by way of a tax demand may just be
the need of the hour. Coupled with a strong domestic judicial system,
TP disputes could also be avoided through bilateral dialogue in the
form of mutual agreement procedures and advance pricing agreements
that heavily rely on the will and motivation of the tax administrators
to resolve such disputes.
The writer is Partner and National Leader — Transfer Pricing, EY.
These views are personal
Most countries today target multinationals to help tax recoveries in
their slow- moving economies, but only those tax regimes that offer
policy certainty and are open to dialogue stand a better chance of
attracting global investment
India has blocked dispute resolution options for a bunch of taxpayers
from Korea, France, Germany and Singapore. It needs to dilute its
position and try to eliminate economic double taxation for taxpayers
VIJAY IYER
Sebi lays down framework for search and seizure operations
BS REPORTER
Mumbai, 14 November
The Securities and Exchange Board of India ( Sebi) has laid down the
framework for " search and seizure" operations to conduct
investigations more effectively.
The stock market regulator issued draft ' Procedure for Search and
Seizure Regulations 2013' on Thursday and invited public comments till
the end of the month.
The new regulation gives Sebi the powers similar to that of the
income- tax department; the stock market regulator can seek
information from any individual, regardless of whether he or she deals
with the stock market.
It also allows Sebi to enter and search any building, vessel or
aircraft, break open a lock or door, search any suspicious person and
record statement under oath and also seizure documents.
For this, the Sebi chairman has to authorise a search and search
operation to an investigating officer after he is convinced that it is
necessary. The chairman will do so by issuing a warrant of authority
in writing.
In July, the Securities Laws ( Amendment) Second Ordinance, 2013 was
promulgated, giving Sebi new powers of search and seizure along with
attachment of properties.
Sebi has already attached more than 150 bank accounts to recover dues
to the tune of ₹ 1,500 crore from violators.
--
CS A Rengarajan
9381011200
CS Benevolent Fund is a collective effort towards extending the much
needed financial support to the community of Company Secretaries in
times of distress Let us lend support and join for noble cause.
SHARING KNOWLEDGE SKY IS THE LIMIT
This mail and its attachments (if any) are confidential information
intended for persons to whom the email is planned for delivery by the
sender. If you have received this mail in error please notify the
sender of the error by forwarding the email and its attachments (if
any) and then deleting the mail received in error and the relevant
email trail in this connection without making any copies or taking any
prints.
------------------------------------
receive alert on mobile, subscribe to SMS Channel named "aaykarbhavan"
[COST FREE]
SEND "on aaykarbhavan" TO 9870807070 FROM YOUR MOBILE.
To receive the mails from this group send message to aaykarbhavan-subscribe@yahoogroups.comYahoo Groups Links
<*> To visit your group on the web, go to:
http://groups.yahoo.com/group/aaykarbhavan/
<*> Your email settings:
Individual Email | Traditional
<*> To change settings online go to:
http://groups.yahoo.com/group/aaykarbhavan/join
(Yahoo! ID required)
<*> To change settings via email:
aaykarbhavan-digest@yahoogroups.com
aaykarbhavan-fullfeatured@yahoogroups.com
<*> To unsubscribe from this group, send an email to:
aaykarbhavan-unsubscribe@yahoogroups.com
<*> Your use of Yahoo Groups is subject to:
http://info.yahoo.com/legal/us/yahoo/utos/terms/
No comments:
Post a Comment