Time for Transfer Pricing Compliances

TP compliance deadline of October 31 is fast approaching & companies to be ready for filing Form 3CEB, Maintaining TP documentation, filing  CbC notification (if parent entity follows calendar year), and submitting  Masterfile notification. Masterfile filing & safe harbour form is due by the end of November 2024

1. Form 3CEB – Critical pointers
   Form 3CEB requires precise disclosure of international transaction &SDT between AEs. Simply relying on AS18 for RPT disclosures is insufficient, as both conditions under sections 92A(1) & 92A(2) must be satisfied. Deemed AEs & Deemed transactions are often overlooked & hence identification is the key.

   Evaluate hidden transactions – e.g  free-of-cost assets from the AE require evaluation for disclosure, considering their implications as notional costs and GST treatment. The issue of shares, while not classified as an international transaction by the Supreme Court, still demands careful disclosure due to the form’s lack of updates. Additionally, interest-free loans/ corporate guarantees from Indian HQ to AEs to be assessed if they are quasi equity/shareholder activities and hence there was no compensation. Changes in FAR profile & characterization of the assessee to be evaluated under Business restructuring. Overall, these transactions require thorough  evaluation & disclosure to ensure compliance with ALP standards.

   Distinction between services & reimbursements is critical. Understanding nature of transaction is vital. For instance, when an AE reimburses the salary costs of Indian employees, it may indicate that these employees are providing services such as sourcing or marketing for the AE, rather than simply being in nature of reimbursement. As a result, pricing for these transactions should be reevaluated, focusing on the transaction’s nature instead of solely relying on the pricing policy.

   Lastly, companies with Service charges, royalty payments, & management fees to prove need benefit test and maintain cost allocations, and pricing justification.

2. Time for action
   Crucial time for companies to evaluate the need if any for a suo moto adjustment if an international transaction is not at arm’s length post book closure. Companies can voluntarily adjust their transfer price to comply with the arm’s length principle in the IT return, which may increase their income or reduce losses.

   For those opting for safe harbour, if their margins fall short of the targeted margins, then decision for suo moto adjustment to meet the safe harbour margins needs to be made before filing the 3CEB.

3. Foreign entities Compliances
   A foreign entity with income accruing or arising in India and a registered PAN in India is required to file Form 3CEB. Foreign entities must maintain their own transfer pricing documentation and cannot depend on those prepared by their Indian subsidiaries.

UAE – TP Disclosure Form

UAE TransferPricing (TP) disclosure form is now enabled in the EmaraTax Portal. The taxpayers while filling out the corporate tax return need to fill in the details on the TP discourse form.

The form provides the list of information which needs to be captured – related party transaction, connected person, adjustment to gains and losses relating to opening balances w.r.t RPT.

VSTN’s alert captures in detail the contents of the form and also provides key aspects and takeaways for business in relation to:

1. No threshold / de-minimis limit w.r.t. transactions
2. Option for entities going in for smallbusiness relief (SBR)
3. As other method has not been listed in the drop down for the most appropriate method (MAM)- what approach can one adopt
4. Payment to connected person – No option provided for disclosure of the MAM
5. Position for entities forming part of Taxgroup
6. Suo motto adjustment in the return – is the adjustment required to the median or lower quartile
7. Instances where combination of methods are considered, as permitted by UAE TP regulations
8. Maintenance of localfile / Masterfile as mentioned in UAE CT Law Vs actual filing of document – viewed as a proof for contemporaneous documentation
9. Other transactions – receivables, free of cost – positions one can adopt

Taxpayers and stakeholders, at large, are awaiting the FTA to issue guidance on the TP Disclosure form for enabling taxpayers to file the appropriate information as well be “Tax-ready” w.r.t. TP compliances expected from a UAE perspective.

VSTN can support UAE business on the transfer pricing requirements and can help to guide taxpayers through the required compliances and also help to streamline the transactions to ensure effective implementation of the TP policies.

Read More…

CASC Article – Corporate Guarantee

VSTN’s recent article on “Corporate Guarantee- A deep dive ” is coauthored by Nithya S  and RS Chitra  which was published in the CASC Monthly Bulletin” for October 2024.

The article covers the topic of Corporate Guarantee within the context of  transfer pricing, examining whether providing a corporate guarantee constitutes an international transaction. It also delves into benchmarking approaches used to assess such guarantees and highlights litigation trends related to this issue.

Additionally, the article discusses the interplay between GST (Goods and Services Tax) and corporate guarantees, exploring how they might interact from a tax compliance perspective. It also provides insights on international perspectives regarding corporate guarantees and key global jurisprudence.

Read More…

Direct Tax Vivad Se Vishwas Scheme (DTVSV), 2024

The Finance Minister presented the full year Union Budget for 2024-25 on 23 July 2024. As a measure to address the rising number of pending litigation cases at various levels, it has been now proposed to introduce DTVSV, 2024 with an objective of providing a mechanism for dispute resolution, which shall also apply to pending Transfer pricing Appeals.

The Vivad Se Vishwas Act, 2020, which dealt with appeals pending as of January 31, 2020, was an initiative which received widespread support from taxpayers and contributed significantly to government revenue. However, litigation backlogs have continued to increase, with more appeals being filed than resolved. In light of the success of VSV 2020 and the rising number of appeals pending, the introduction of DTVSV 2024 aims to establish a framework for settling disputed issues, thereby reducing litigation while minimizing the financial burden on the taxpayer.

VSTN alert summarizes the key aspects of the DTVSV 2024 notification which provides details of

1. Eligibility
2. Amount payable by the applicant
3. Filing of declaration and particulars to be furnished
4. Timing and Manner of Payment
5. Non applicability of Scheme

Read More…

HMRC Guidance – Risk Indicators For TP Policy Design

HMRC UK issued Guidance for compliance (in 3 parts) on 10 Sep 2024 on common risks in TP approaches for MNE. Part 3 of the guidance sets out a list of non-comprehensive high-risk indicators (that can result monetary outflows) on TP policy design risk, which is discussed in this post. Few key takeaways from the guidance for businesses w.r.t. TP:

1. Intercompany contract to always reflect actual conduct between group entities, and returns / profits cannot be attributed solely on the basis of contract in absence of actual assumption of relevant risks / performance of functions. Further to attribute residual returns, entity to perform key functions / bear economically significant risks.
2. Functions performed / value creation of entity to be looked wholistically. Where entity performs multiple complex functions, TP policy should not fragment these functions into separate routine activities providing fixed low returns.
3. Economically significant risks w.r.t. IP cannot be outsourced and will have to be controlled by the owner, including capacity & capability to bear the risk. Where an entity undertakes future additional development (performing & controlling DEMPE) to existing IP which it does not own, such entity will have to receive the residual return attributable to additional development and not owner of original IP. Benefits should correspond to royalty / fees paid for license of IP. Entities should document internal/external CUP w.r.t. intangibles. Robust documentation for waiver of royalty w.r.t. non-sales related factors.
4. Entity in a CCA generating losses will have to be documented, as no third parties would be part of such CCA, without expected future profits. Returns to be updated & commensurate with functions, in case of material changes to functions & risks of entities in a CCA.
5. Entity performing global or regional functions, having positive impact on group entities’ revenue / profit cannot be grouped under low-value adding activities. Continuous non-charging for services rendered is not arm’s length in nature.
6. Entity to be appropriately compensated on cost or revenue as applicable. Parallelly each cost center / function or activity to be accurately delineated &compensated & not generalizing it as routine services.

Where risk indicators are identified, one can adopt the best practices in the guidance to reduce such risks, and if identified but has not resulted in TP risk – one has to maintain detailed documentation to substantiate the same.

The guidance from HMRC provides a sneak-peek partly into riskassessment framework of tax authority, ensuring transparency and certainty w.r.t. expectations of the Revenue. Though this guidance is issued by HMRC, the basis / principles of these risk indicators can be applied across jurisdictions.

CASC Article – Indian Safe Harbour Rules

VSTN’s recent article is on “Understanding Safe Harbour Rules: An In-Depth Analysis” coauthored by Nithya Srinivasan and Krithika Valliappan which was published in the “CASC Monthly Bulletin” for September 2024.

The attached article discusses about India’s Safe Harbour rules for transfer pricing and the evolution of these rules, their objectives, and their impact on taxpayers. The article also examines the reasons for their low adoption and suggests potential improvements to enhance their effectiveness and appeal as also mentioned in the FMs Budget speech that the scope of safeharbor rules would be expanded/revised.

Read More…

CASC Article – Interest on Overdue Receivable

VSTN Article on “Interest on overdue receivables” coauthored by Nithya S and Ranjani S which was published in the “CASC Monthly Bulletin” for August 2024.

The attached article discusses about the Imputation of notional interest on overdue receivables which holds a prominent position amongst the most recurring transfer pricing adjustments that are being imposed by the Revenue authorities in the recent times.

While this issue has been subject matter of many tax rulings, various principles have emanated from the rulings.

Read More…