m.financialexpress.com/news/transfer-pricing-rules-to-be-linked-to-profitability/974800/
The finance ministry is set to notify rigorous limits for
companies to value transactions with their foreign arms
and thus make any tax evasion tougher as firms brace
for meeting the November 30 deadline for filing
“transfer pricing returns”. The idea is to prevent
undervaluation or overpricing of goods and services in
transactions within a multinational corporation with an
India connection with the intention of shifting profits
and tax liability to another country.
Transfer pricing refers to the price/charges at which
related parties do cross-border trade of goods, services
and intangibles.
The ministry’s new norms come in the wake of growing
disputes between India’s tax authorities and firms over
the pricing of cross-border transactions, which the
authorities suspect are often used to shift unaccounted
money overseas. The idea is to incentivise companies
to report profits in India, rather than abroad.
According to officials, the new norms will allow
companies in sectors with the highest operating
profitability — say, the information technology and
business process outsourcing industry — to declare
transfer price within a band of 5% against the “arm’s
length” price determined by the tax officer. In case of
companies in sectors with lesser profitability, the
variation allowed would be smaller.
The arm’s length price is computed based on similar
transactions by unrelated companies. If the declared
value is within the allowed range, the authorities will
not make any adjustments to it and the price quoted by
the firm will be accepted.
The Central Board of Direct Taxes is studying the profit
margins prevalent in various sectors now and will soon
prescribe the permissible variation in the value of
cross-border transactions within corporations
compared with their corresponding arm's length pricing.
The board considers R&D and knowledge process
outsourcing firms also to be making high profit
margins. On the other hand, in merchandise trade,
which often happens in a highly competitive
environment, companies would be given no or very low
permissible variation while quoting the value of cross-
border transactions.
“If the operating profitability (operating profit/total
cost) in a sector is, say, 5%, then the maximum
variation between the declared value of the transaction
and the arm's length price of a company in that sector
cannot be more than 1%,” an official privy to the
discussions told FE about the thumb rule the
government will adopt.
Profitability in the services sector is much more and as
per an earlier government study, it was an average of
25% in the IT sector. Tax experts say this is not
representative as an arithmetic mean of figures from
the worst and best performing companies in the sector
distorts the picture and makes even a 5% flexibility in
arm’s length price not enough. They expect the
government to correct this in the new norms, referred to
as the safe harbour rules.
Experts said about 16 nations including the US and UK
exclude extreme results while calculating the arm's
length price, as this gives more accurate and reliable
results compared with the arithmetic mean, which India
uses. “The OECD too advocates this... We hope that
the government would take the right steps towards
pragmatism and adopt global best practices in transfer
pricing norms," said Rahul K Mitra, PwC's national
leader, transfer pricing. He said the delay in notifying
the permitted ranges for FY12 has already caused
significant hardship to taxpayers in trying to set inter-
company prices, as the fiscal year has already been
completed.
Indian authorities are reckoned as tough globally in
transfer pricing matters, with the country accounting for
about 70% of all global transfer pricing disputes by
volume. In Budget 2011, the government withdrew the
5% variation permitted to all companies between the
declared value and the arm's length price so as to
prescribe specific rates for different sectors depending
on the changing fortunes of the economy.
