India APA – FY 23-24

India’s record tally of APA concluded – FY 2023-24

The Ministry of Finance issued a press release yesterday, 16 April 2024, on the total number of AdvancePricingAgreement concluded in FY 2023-24 between CBDT and taxpayers.

FY 2023-24 marked a milestone of highest number of total APAs concluded as well highest unilateral APA (UAPA) and bilateral APA (BAPA), individually. Total number of APAs concluded were 125, first year the 100-mark was crossed, around 32% increase from the FY 22-23. UAPA also witnessed a significant increase of about 37% from FY 22-23 viz., 86 in FY 23-24 from 63 in FY 22-23. BAPA witnessed a margin increase to 39 in FY 23-24 from 32 in FY 22-23. Treaty partners with whom BAPA was concluded include Australia, Canada, Denmark, Japan, Singapore, UK and US.

The increase in conclusion of UAPA is a result of commitment by the CBDT to improve the efficacy of APA programme, resulting in reduction in inventory of pending APA applications. Sustained increase in BAPA concluded also points that APA programme is maturing towards complete dispute resolution.

Dispute prevention programmes such APA provide significant relief to taxpayers, thereby reducing costs and efforts of taxpayers in transferpricing litigation and the Indian APA programme has displayed continued commitment in wholistic dispute resolution.

HMRC Guidance on Risk

Delineation of transactions- risk analysis

Delineation of transactions is foundational for determining the most appropriate TP method & analysis of risk is the bedrock for accurate delineation of transactions. Recently HMRC issued guidance on risk w.r.t. transferpricing and also provided its view on certain contentious areas.

Some key takeaways from the HMRC’s Guidance for businesses is as below:

1. For TP, risks are effect of uncertainty on goals of business. Economically significant risks are relevant, not all risks. These can be identified by scale & likelihood of their realization.
2. Control over risk is not dependent on the level of management, but where decisions are taken on whether or not to pursue the opportunity as well as how to respond to risk associated when the opportunity is pursued. Hence, even a subsidiary may have control over the risk though overseen/reporting to Group, irrespective of it being party in the contract.
3. Entity having control over the risk can outsource the risk mitigating activity. Ex. entity controlling R&D risks can outsource R&D activity, provided outsourcing entity gives definite objectives for operations & supervises the other entity. Therefore, compensation for R&D service provider (or any entity to whom risk mitigating activity is outsourced) will depend on whether or not it has control over risk. In case of MNE Group having marketing entities in multiple jurisdictions with technology activity centralized in one jurisdiction, the economically significant risks w.r.t specificity & entities having control over such risks will have to be analyzed. This will decide if one-sided or two-sided method is appropriate, and for one-sided method which entity will earn routine return and retain residual returns respectively.
4. Multiple group entities may contribute to control over risk, but it will be allocated to entity having most control. Risk allocations cannot be purely based on the form of remuneration i.e., an entity compensated on variable returns as per contract does not mean the entity has de facto control over risk.
5. In most cases, compensation to entities contributing to the control over risk but not assuming (not allocated) control over risk will be priced through one-sided method. However, depending on the extent of contribution by the entity, use of a one-sided or two-sided method will be determined. Ex, where R&D risk is significant risk for a Group and 4 entities from different countries undertake R&D activities, R&D risk will be allocated to one entity which has maximum control. Whether or not the compensation for other entities will have to be priced using one-sided or PSM will depend on the extent of contributions by each of the entity.
6. Deciding the use of ex-post or ex-ante profits for PSM will depend on the extent of shared assumption of risk by the entities.

Amount B – Guidance

OECD issues Amount B report

The OECD issued the final report on AmountB on 19 Feb 2024. These rules will form part of the OECD transferpricing guidelines and has been rechristened as the simplified and streamlined approach (the approach), instead of Amount B.

The approach is applicable for wholesale buy-sell marketing & distribution transactions and sales agency and commissionaire transactions. Exclusions are non-tangible goods, services and commodities.

Key aspects of the report are:

1. Jurisdictions to decide on implementation of the approach in their respective taxregime. Jurisdictions can include the approach in their taxlegislation either in an elective manner or perspective manner
2. It is largely based on the public consultation document issued in July 2023.
3. The arm’s length consideration in the approach is not to be considered as a floor or ceiling for distribution activities in general.
4. India has made several reservations across the report, including not supporting the approach if qualitative criteria is not included.
5. Scoping criteria – can be tested using one-sided TP methods and quantitative filters – operating expenses over net sales.
6. Arm’s length consideration arrived through pricing matrix, operating expense cross-check and country risk adjustment.

The finalization of the approach is a landmark development in the direction of disputeresolution as it is a consensus document by the g20 inclusive framework. Wide adoption of the approach by jurisdictions can provide taxrelief to mnc groups w.r.t. protracted litigation for baseline distribution activities.

The detailed analysis of the report is captured in the attached @VSTN alert.

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KSA RHQ Tax Rules V1

Kingdom of Saudi Arabia – Regional Headquarters (“RHQ”) Tax Rules (“Tax Rules”)

The Zakat, Tax & Customs Authority (“ZATCA”) recently published the Tax Rules, further to the RHQ program issued in December 2023 (link to previous alert in comment). The Tax Rules lays down the below provisions relating to tax incentives available to RHQs.

1. RHQs will be subject to Tax & Zakat Laws unless explicitly exempted under the Royal Decree.
2. RHQ to be registered with the Authority as per the TAX & Zakat Laws and to file TAX & Zakat returns
3. RHQs meeting the qualification criteria are eligible for 0% Corporate Tax & Withholding Taxes on payment of dividends, payments to related persons & payments to unrelated persons in respect of services essential to RHQ activities. Tax incentives for the eligible activities available for 30 years, subject to renewal
4. The payments to related persons are required to be in compliance with the arm’s length principle in order to be eligible for the tax incentives. Related Persons shall have the same meaning as prescribed under the Transfer Pricing Bylaws
5. Non-eligible activities are not eligible for Tax incentives & the income in respect of such activities shall be determined on the basis of the existing tax laws
6. RHQs must meet the economic substance criteria which requires RHQs to:-
   • hold valid license issued by Governing body & carry out only those activities specified
   • have adequate premises inside KSA to carry out its activities
   • carry on strategic direction & management function
   • incur operational expenditure in KSA commensurate with its activities
   • generate revenue from eligible activities inside the Kingdom
   • have at least 1 resident director on Board & activities of RHQ shall be directed & managed in KSA including  board meetings
   • employ adequate no. of employees commensurate with it’s level of activity. Further such employees should have the requisite skills to perform activities of the RHQ
7. RHQs must file annual returns with the Authority for purposes of verifying compliance with economic substance criteria
8. RHQs are required to maintain separate accounts in respect of Non eligible activities
9. It also lays down penalties for RHQs in respect of non-compliances with economic substance criteria during the license tenure

It hence becomes imperative for businesses to ensure that they are ready from a transfer pricing perspective in order to ensure smooth implementation

ZATCA has stated that a detailed guidelines would soon be issued explaining the provisions of these Tax Rules. The anticipated guidelines is expected to bring more clarity with regard to the provisions of the Tax Rules.

Way forward

The Tax rules mandate RHQs to comply with economic substance criteria apart from adhering to  transfer pricing regulations to be eligible for tax incentives. Hence it is evident that RHQs would be subject to rigorous scrutiny to ensure such compliances are met & therefore there is a need for robust documentation to substantiate the same to authorities at any given point of time.

KSA updates

Kingdom of Saudi Arabia (KSA) recent TP developments

January 01, 2024, marks the advent of certain key TP developments in KSA, the most significant being:-

1. Applicability of Transfer Pricing provisions for Zakat Payer; and
2. Kickstart of the Regional Headquarters (RHQ) regime in KSA and corresponding TP impact

It hence becomes imperative for businesses to ensure that they are ready from a transfer pricing perspective in order to ensure smooth implementation

Considering that the above regulations came into effect from 01 January 2024, we have put across the attached alert which analyse the above regulations in light of the Transfer Pricing provisions.

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UAE tax groups

The UAE Corporate Tax Regime introduced the concept of “Tax Groups” for Corporate Tax purposes. Though the concept of Tax Groups is not new as it already applies for VAT Regulations in UAE, one must understand that the governing provisions under the Corporate Tax Regime applicable for Tax Groups is far more stringent as compared for VAT purposes. It is significant to note here that a Tax Group for Corporate Tax purposes is different from Tax Group for VAT purposes.

The FTA recently issued a corporate tax guide on Tax Groups with an intent to provide better clarity and understanding of the tax provisions relating to Tax Groups. The Guide is exhaustive in terms of the several interesting examples that it offers, designed to reduce the ambiguity in applying the said provisions.

Article 40 of the Corporate Tax Law allows Companies under common ownership to form Tax Groups, subject to meeting certain conditions. Tax Group will be treated as a single Taxable unit thereby offering many advantages in terms of:-

• reduced compliance burden for individual companies by consolidating accounts;
• eliminating intra group transactions,
• increasing flexibility in utilisation of tax losses; and
• not requiring to comply with the Transfer Pricing Regulations and arm’s length principle except in certain circumstances.

Whilst forming Tax Group looks very lucrative, there certain limitations which must also be considered by Businesses while evaluating the option to form Tax Group. For instance the corporate tax thresholds (i.e 0% Taxable Limit of AED 375,000 and SBR limit of AED 3 million) will be applied on the taxable income of the Tax group rather than to the individual members of the Tax Group. Thus the decision to form a Tax Group will need to be assessed on case to case basis considering the group structure, the benefits and value addition that is likely to accrue to the business group in light of opportunity cost involved.

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Safe Harbour Rules

Safe Harbour Rules – Recent Amendment to Financial transaction and Operating Income / Expense definition

The CBDT issued a notification on 19 December 2023 amending the existing safeharbour rules applicable from FY 2023-24. The alert captures in detail the amendments to the existing Safe Harbour Rules which include:

1. For foreign currency denominated loans, transition from LIBOR to AlternateReferenceRate (ARR). Currently 6 prominent ARR have be provided for the respective currency viz., SOFR (USD), EURIBOR (EUR), SONIA (GBP), TORF (Yen), BBSW (AUD) and SORA (SGD)
2. Extending the coverage of Safe Harbour to all associatedenterprise, which is currently eligible for loan advanced to wholly owned subsidiary.
3. Removal of ceiling for loans advanced denominated in foreign currency. Introduction of slabs for the spread over the ARR based on the quantum loans advanced i.e., upto INR 250 crores and greater than INR 250 crs.
4. Credit rating defined to mean ratings obtained from an agency approved by SEBI and accredited by RBI. Further in case of multiple credit ratings, the lowest to be considered for the purpose of Safe Harbour rules.
5. For loan advanced to associated enterprises to be eligible under Safe Harbour, existing condition on sourcing of loan in INR has been removed.
6. Definition of operating income and operating expense amended w.r.t profit / loss on transfer of assets. As per the amendment, where depreciation on the transferred asset is included in operating expense, the profit or loss arising on account of such transfer will also be treated as operating in nature.

With these welcome amendments, the scope of covered transaction under the safe harbour has increased and businesses can consider opting under the Safe Harbour route to effectively and efficiently manage their transferpricing disputeresolution.

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Imputation of notional interest on overdue receivables

Transferpricing adjustments of “Interest on overdue receivables” holds a prominent place in the list of adjustments carried out by taxauthorities. In a TP environment, long overdue receivables (O/R) often being alleged as deemed loan/ capital financing / working capital finance among AssociatedEnterprises (“AE”) thereby construed as an international transaction u/s 92B by Revenue

Globally, few countries like UAE, Korea, in their law also impose arm’s length compensation from the taxpayers i.e., interest, in case receivables are not settled consistently.

In audit proceedings the tax authorities call for debtors ageing and in the event O/R falls due beyond the credit period (30/60 days), they tend to impute notionalinterest on the basis of SBI Prime Lending Rate (PLR) / bond yield rate/ LIBOR (ARR) plus BPS, etc.,

This issue has been subject matter of various tax proceedings and various principles have emanated from those rulings. Considering the same, key pointers one needs to evaluate are:

1. Transaction needs to be looked into from the angle of uncontrolled situation – between unrelated parties- charging interest to third parties
2. Whether the taxpayer is paying any interest in case of delayed payment on overdue payables to AEs
3. Option of knocking off of interest on overdue payables with that of the overdue receivables can be explored as a defense strategy
4. Taxpayers can resort to claiming workingcapital adjustment, as additional imputation of interest on O/R is not warranted if the pricing/profitability of taxpayer is more than working capital adjusted margin of comparables companies
5. In case of debt free companies one could take a position that there is no impact on working capital and hence no opportunity cost on account of delayed realisation of receivables
6. O/R cannot be treated as a separate transaction as it originates from the main transaction of Sale, which has already been benchmarked

Taxpayers’ nature of business (manufacturing/trading/service) has a strong bearing on O/R and hence it has to be treated accordingly. For eg., Service recipient gets benefitted as soon as Service provider renders the work, whereas in case of manufacturing & sales, though invoice is raised immediately, the buyer (in case of overseas sales) will not make any payment before the goods are received. Hence, one needs to also factor in the shipping lead time before imputing such interest for product sale companies.

Further one has to ensure that the actual outcome of O/R is aligned with the terms of the agreement/invoice to see if there are any gaps.

It is imperative to have a clear understanding of the business model, market dynamics and third party receivables which might help in arriving at a conclusion whether or not to deem the Accountsreceivable as an advance subject to interest charge.

 IOSR article

Research Article – IOSR Journal

As part of VSTN ‘s thoughtleadership, glad to share that our researchpaper has been published with @IOSR Journals demonstrating ‘core competence’ which is one of the Core pillars of VSTN

This paper examines the Indian arm’s length range in light of skewness in a data set and its vulnerability, followed by an analysis of “adjusting” the Indian arm’s length range in an intuitive manner, bearing in mind the intent of the Indian arm’s length range. Parallely, the paper also nudges for a transition from the existing Indian arm’s length range to interquartile range from a statistical perspective, beyond the usual rhetoric of alignment with the global standards.

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Key actionplan for business on UAE Transfer Pricing

Though uae corporatetax regime kick started from 01 June 2023, the Corporate Tax regulations will become applicable to many businesses who have Calendar Year as their accounting period i.e., their first tax period commencing from 01 Jan 2024.

Transferpricing readiness is a crucial aspect in ensuring smooth implementation of corporate tax regime within the business environment. Further it would be critical for these businesses due to the transitional provisions in place, to evaluate undertaking any transfer pricing related adjustments / correction for year ended 31 Dec 2023, as the period end balances would become opening balances for the first applicable tax period and hence required to be at arm’s length.

Recently the FTA issued the Transfer Pricing Guide to provide general guidance for the taxpayers on Transfer pricing, in lines with the TP Guidelines issued by the OECD. The various ministerial decisions and the Transfer Pricing Guide issued brings out the importance that FTA has placed on Transfer pricing in UAE.

To this end, we are pleased to share an alert on Key Action points that businesses will have to bear in mind to ensure preparedness from a Transfer Pricing perspective. The alert is presented in a lucid manner through providing pointers and aims to aid common businesses by catalysing their efforts in being compliant on transfer pricing.

The primary focus of the alert includes pragmatic approach for transfer pricing and other key aspects such as documentation requirements, pointers on key transactions and taxaudit.

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