Amount B – December 2024 Updates

1. Simplified Streamlined Approach (SSA) by IRS:

   On Dec 18, 2024 US released Treasury Notice (NOTICE 2025-04) intending to issue regs on SSA in alignment with OECD PillarOne – Amount B. The SSA seeks to simplify pricing for baseline marketing & distribution activities by adopting a return on sales percentage from the global pricing matrix & EBIT-to-operating expense ratio cap & collar & country risk adjustment. Key aspects w.r.t. IRS’s notice, apart from Amount B framework, is summarised below:

   1. Taxpayer may rely on SSA for taxable years commencing from January 1, 2025.
   2. SSA similar to Comparable profits method (equivalent of TNMM in OECD guidelines). However, taxpayer can apply CUP (internal or external), where available, instead of SSA.
   3. US proposing applicability of SSA under Option 1 – i.e., at option of taxpayer. But also considering if Option 2 should be permitted viz., may be optional for taxpayer but IRS can decide to apply even if taxpayer has not opted for the same.
   4. Criteria for qualifying transaction – upper bound of Opex-Revenue is 30% for US distributor or if distributor country has not adopted SSA. If non-US distributor & the distributor country has adopted SSA, specified ratio should be x, where 20%≤ x ≤30%.
   5. Taxpayers need to Elect to apply the SSA along with tax return.
   6. Considering incorporating SSA as a Safe Habor – deemed satisfaction of arm’s length st&ard. After taxpayer‘s valid election to SSA no option to disavow later & shall constitute consent to IRS’s use of SSA in calculating any applicable adjustment. Taxpayers must have sufficient documentation proving compliance, which should be available at filing & provided to the IRS within 30 days upon request.
   7. Arm’s Length range & IQR not to apply to SSA.
   8. IRS evaluating an alternative election mechanism for SSA, other than on a transaction-by-transaction & taxable year basis.

   IRS ‘s Notice invites public comments on incorporation of above SSA within Regs 482 on or before March 7, 2025.

2. OECD –Amount B automated tool:

   On Dec 19, 2024 OECD released Pricing Automation Tool (Excel spreadsheet) to simplify the calculation of returns for in-scope parties with minimal data input. The key aspects are:

   1. Applicable for fiscal years starting on or after January 1, 2025.
   2. Jurisdictions included for illustration & do not reflect any intentions of adoption of Amount B. India not appearing in jurisdiction, perhaps due to reservations.
   3. Input data- jurisdiction, 3 years financial data – net revenues, COGS, operating expenses, fixed assets, working capital, & industry classifications.
   4. Key outputs – Evaluation of quantitative scoping criteria, Accounts payable, final return on sales after considering the pricing matrix, cap-&-collar mechanism & adjustments for operating expenses & data availability.

Bahrain – Implementation of Tax on MNEs

As a member of the OECD Inclusive Framework and a signatory to the Pillar 2 Solutions, the Kingdom of Bahrain issued Decree Law No.11 – Regarding implementation of tax on multinational enterprises (“The Law”), on September 01, 2024, introducing the Domestic Top Up Tax for Multinational Enterprises (“ MNE’s”). This was followed by an Executive Regulation issued by the Ministry of Finance and National Economy, through Decision No.(172) of 2024 (“Regulation”), which contains the detailed by-laws relating to the Decree Law No.11.

The Law shall come into force from January 01, 2025 and shall be applicable to Constituent Entities of MNE Groups, within the Kingdom of Bahrain provided the MNE Group’s global consolidated annual revenue exceeds EUR 750 million in 2 out of 4 fiscal years immediately preceding the current Fiscal Year. Where the Revenue threshold is met, a minimum effective tax rate of 15% shall be complied with by such Bahraini Constituent Entities.

With this introduction of DMTT, all constituent entities of MNE Group operating in the Kingdom are subject to the transfer pricing provisions and are expected to maintain Local file and Masterfile. The features of the TP regime are on similar lines to the OECD guidelines

Given that the Law comes into force from January 01, 2025, the onus is on the MNEs who have constituent entities within the Kingdom to assess and evaluate the applicability and impact of the said Law to ensure seamless transition to the new regime!

VSTN’s attached Newsletter captures the key parts of DMTT law with emphasis on the TP rules which are to be implemented.

Know More…

Navigating Year End Transfer Pricing Adjustments

With the fiscal year coming to a close for MNEs operating on a calendar year basis, it is essential to evaluate whether transfer prices need to be revisited before yearend closure. In the UAE, CT law has kicked in for years commencing after 1 June 2023 & this would be the first year of TP compliance for many UAE businesses with calendar year. All related party transaction should meet the arm’s length standard irrespective of any thresholds, making it vital to streamline TP policies & make necessary year end adjustments.

Companies carry out year end adjustments (True-up/True down adjustment) if faced with one of the below scenarios

• Actual results/margins deviate from targeted margin as per intercompany agreement/pricing policy
  Eg:where fixed return model is followed by a limited risk bearing entity (contract manufacturer/LRD/contract service provider) deviations can be due to differences between budgeted & actual costs & billings based on budgets; or variance in components of costs considered for billing & for TP purposes (operating costs).
• The actual margin earned is not at arm’s length when compared to comparable companies for that particular period, based on the comparability analysis carried out to arrive at the arm’s length range.

These adjustments are necessary to achieve arm’s length results in compliance with local regulation & reduce exposure of audit adjustments. Any adjustment done post book closure can only be considered in the tax return (ie suo moto adjustment) & may give rise to other implications (additional interest, secondary adjustment if applicable in that country).

While performing yearend adjustments one needs to consider:

1. Whether intercompany agreements contain applicable clauses relating to true-up/true-down adjustments
2. When adjustments are required as per scenario b) above, to what point of arm’s length range should the adjustment be made by UAE taxpayers– 25th/75th percentile or median of the dataset?
3. In a one sided-testing approach, whether the adjustments made would be acceptable & justifiable from the viewpoint of the counter party’s jurisdiction
4. Implications on duties paid (Customs) for imports when there is downward price adjustment-whether the same would be treated as sunk cost or refund can be claimed
5. Revenue figures reported in periodic other statutory filings (indirect tax filing) during the year-whether the same should be revised
6. Interplay with Pillar2

While year end adjustments may be inevitable in some cases, it is desirable that the adjustment quantum is minimal. This is possible through periodic (monthly, quarterly) monitoring & evaluation of profitability levels through the year. This is where operationaltransferpricing gains importance & technology tools can be leveraged for effective implementation of TP polices.

Safe Harbour Rules (SHR) – Sale Of Raw Diamonds By Foreign Company

The CBDT on 29 Nov 2024 issued a notification to extend the existing SHR for AY 2024-25. The notification also introduced new SHR for sale of raw diamonds by Foreign company chargeable under Profits & gains of business or profession(‘PGBP’).

Due date u/s 139(1) for AY 2024-25 has been extended to 15 Dec 2024. Eligible Taxpayers may consider opting under safe harbor for their eligible international transactions for FY 23-24, as the due date for filing the application for Safe Habor is now extended to 15 Dec 2024.

The New SHR is introduced for the first time for Section 9(1)(i) – within the power u/s 92CB, unlike earlier Safe harbor which was for determination of ALP u/s 92C / 92CA. Introduction of the new SHR was mentioned in the budget speech by the Finance Minister for FY 2024-25, which was a long pending demand from the industry. The industry expressed that foreign mining companies were deterred from sale of raw diamonds in India due to issues surrounding Permanent establishment ( PE ). The new SHR is akin to presumptive basis of taxation in PGBP. Key points of the new SHR is provided below:

Eligible Assessee – Foreign company in the business of diamond mining

Eligible Business – Sale of raw diamonds in any notified specified zone as per Section 9(1)(i) Expl.1 (e)

Safe Harbor – 4% of the gross receipts to be charged as profits & gains under head of PGBP. Deductions u/s 30 to 38 shall be deemed to be provided. No set-off of unabsorbed depreciation or business loss shall be allowed.

Other Aspects – To opt under new SHR, application to be filed by taxpayer in Form No. 3CEFC. Rule 10TIB provides detailed process / procedures for Assessing officer to determine whether taxpayer has correctly opted under the new SHR. Taxpayer cannot invoke Mutual Agreement Procedure (MAP) where new SHR is opted. Sections 92D and 92E would be applicable if the eligible assessee enters into international transaction.

With regard to above, one has to consider the following:

1. New SHR is for income chargeable to tax under head of PGBP and there is no reference to deemed acceptance from an arm’s length price perspective in case of international transactions
2. Power to make Safe harbor by CBDT u/s 92CB is for determination of ALP u/s 92C / 92CA or section 9 (1) (i). The new SHR is with regard to the latter, and hence the general transfer pricing regulations would continue to apply.
3. As it relates to computation under PGBP, AO undertakes the verification of the Form and there is no reference to transfer pricing officer (TPO) unlike the existing SHR for the international transactions.

Therefore, one will have to evaluate the interplay between the new SHR for Diamond mining – foreign companies and transfer pricing regulations