Union Budget 2019 – Transfer Pricing Proposals
India Budget 2019 includes a number of proposals on transfer pricing that shall have a material impact on cross-border transactions. In this article, we present an overview of the transfer pricing proposals under Union Budget 2019 and how the same shall impact multinational companies insofar as their Transfer Pricing Compliance is concerned.
I. Clarification on Secondary Adjustment
What is Secondary Adjustment?
A secondary adjustment is an adjustment over and above the primary adjustment in the taxpayer's books of accounts to reflect actual allocation of profits between the Associated Enterprises ('AEs') to be consistent with the transfer prices determined under a Transfer Pricing Adjustment (i.e. the Primary Adjustment).
It is proposed to make following amendments [in Section 92CE of the Income Tax Act, 1961 ('Act')+ to align Indian law with international best practices:-
- Secondary adjustments shall not be applicable for Primary Adjustments which are less than or equal to INR 1 Crore (INR 10 Million);
- It is also clarified that Secondary adjustment would be applicable only from Financial Year ('FY') 2016-17 and onwards;
- It is clarified that 'Excess Money' or part thereof, outstanding as a result of primary adjustment could be repatriated from any AE; Tax Times Advocates & Solicitors Issue: 1.1I July, 2019
- If the 'Excess Money' is not repatriated by AE, the taxpayer has an option to pay a one-time tax at the rate of 18% on such excess money or part thereof, depending upon the facts;
- If such option of 'one-time payment' is availed, then no further secondary adjustment or interest needs to computed/ paid.
The above is a welcome measure which simplifies the provisions of secondary adjustment providing an option to assessee to pay additional tax (which is one-time levy) where it is impractical to repatriate 'Excess Money'.
II.Clarification on assessment proceedings by tax authorities on modified return filed post Advance Pricing Agreement ('APA')
APA is an Agreement between the Central Board of Taxes and the taxpayer for determining the Arm's Length Price ('ALP') or the manner in which the ALP is to be determined for an international transaction undertaken or proposed to be undertaken by the taxpayer with its AEs. An APA could be entered for maximum of 9 years, out of which 4 years are roll-back years.
In order to give effect to the APA1, the taxpayer must furnish a modified return in line with the APA. Current provisions empower the Assessing Officer ('AO') to assess or reassess the total income after the taxpayer has filed its modified return of income in pursuance to the APA.
- It is proposed to amend Section 92CD(3) of the Act to clarify that in cases where assessment or reassessment has already been completed and modified return of income has been filed by the Taxpayer (post APA signing) under Section 92CD(1) of the Act, the AO shall pass an order modifying only such portion of the total income of which is impacted by the APA outcome;
- The proposed amendment will be effective from 1st September, 2019.
The above is another welcome step which strengthens the APA mechanism as the proposed amendment clarifies that multinational companies cannot be subject to a complete re-assessment post an APA outcome.
III. Clarification on Filing of Master -file
Currently, Indian Transfer Pricing law provides for filing of a Master file (Form 3CEAD) by a Constituent Entity ('CE') only if the CE has entered into an international transaction.
- It is proposed that any Indian CE shall have to file a Master File even if it has not entered into any international transaction (but for the mere fact that it is part of an 'International Group').
- The amendment would take effect from Assessment Year (AY) 2020 -21 onwards [i.e. it is applicable for FY 2019-20]
The proposed amendment increases the compliance burden on Indian CEs who are merely part of an International Group but have not entered into any international transactions.
IV.Clarification on Country by Country Reporting
The Indian Finance Act 2016 introduced provisions relating to Country by Country Report ('CbCR') and Master File pursuant to adoption of OECD's BEPS Action Plan-13 for international groups with consolidated revenue of INR 5500 crores or above.
Ideally, it is the parent entity of an international group that bears responsibility for Country-by-Country reporting. However, parent entity can designate another entity *Alternate Reporting Entity ('ARE')+ of the group to comply with the CbCR requirement in its local jurisdiction.
- Proposed amendment clarifies that for country-by-country reporting in a situation where the Indian company is an ARE, the accounting year shall be same as the accounting year followed by the ultimate parent entity.
- The proposed amendment will take effect retrospectively from FY 2016-17 onwards.
Where ARE had to file CbCR, undertaking adjustments to CbCR values to account for different accounting years between the Parent and ARE was a herculean task. The above amendment is clarificatory in nature and settles an important issue on the choice of accounting year. The amendment makes it considerably easier for AREs to now file CbCRs.
V.Removal of 'arm's length compliance' requirement in case of offshore funds
Section 9A of the Act provides for conditions in implementation of regime of fund managers. These conditions, inter-alia, are related to payment of remuneration of fund manager at arm's length.
To give a thrust to fund management activities in India, it has been proposed to relax certain constraints with one of them being arm's length remuneration to fund managers. A safe harbor provision (the amount is yet to be prescribed) is proposed to be introduced for remuneration of funds managers.
Experience suggests that taxpayers shall benefit from safe harbors only if the same are realistic or reasonable. Pragmatic safe harbor remuneration for funds managers shall go a long way in ensuring the success of the safe harbor provision.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.