Transfer Pricing – Arm’s Length Analysis

Transfer Pricing – Arm’s Length Analysis Is Not Just Benchmarking Analysis

The UAE TP regulations state that arm’s length standard to be adhered for all transactions between related parties. In this connection there is a perception amongst many taxpayers that arm’s length analysis is only a benchmarking analysis.

This is a misnomer.

Arm’s length standard / analysis is a broader concept & one of the phases of this arm’s length analysis is undertaking a benchmarking study. Some of the key areas / aspects w.r.t. arm’s length principle is as follows:

Understanding facts & circumstances: The economic circumstances surrounding the controlled transactions provides inputs for strategy / approach to be taken for comparability analysis. It also aids in understanding the economically significant risks & key value drivers w.r.t. the entire MNEGroup.
Value chain analysis: The activities performed, assets deployed and risks assumed by each party is the basis for arriving at the characterization of the taxpayer. This includes understanding value contributed by the taxpayer to the Group from a TP perspective.
Most appropriate method (MAM): Understanding the value creation by the taxpayer provides key inputs for determining the MAM for determining the arm’s length nature of the controlled transaction. For the MAM that is determined, the appropriate / relevant benchmarking analysis would then have to be undertaken.

For example, the taxpayer is a distributor, simply undertaking a benchmarking analysis by comparing net profitability of similar distributors would not be the appropriate approach.

- If the taxpayer is the entrepreneur of the MNE Group and controlled transactions is sourcing from other less complex group entities, it would be appropriate to benchmark the results of the related parties rather than the taxpayer.
- Or where the taxpayer undertakes significant marketing activities (including having key IP)– which is one of the key value drivers for Group, depending on facts and satisfying other criteria, profit split method may be evaluated.
- Alternatively, where the taxpayer is a routine distributor and based on the extent of value adding activities, one may need to decide whether RPM or TNMM should apply.

Another example where there is a service provider, simply adopting a cost-plus billing model without understanding the role of the service provider whether it is an entrepreneur or limited risk entity will be faulty.

Further OECD Guidelines & UAE’s FTA TP Guidelines clearly provide for delineation of controlled transaction and undertaking of transactional analysis rather than entity level analysis.

Therefore, one may need to carefully evaluate the above-mentioned facts before jumping the gun on entity level benchmarking at net profit level. The above is more relevant for UAE taxpayers with CY as their accounting year, seeking to finalize the books of accounts.

As businesses expand across borders, navigating complex transfer pricing regulations becomes critical. At VSTN Consultancy, a global transfer pricing firm, we specialize in helping companies stay compliant and competitive across key markets including:

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

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Transfer Pricing Compliance Timelines

As the Indian financial Year 2024-25 has come to an end, it is time for the Indian taxpayers to concentrate on the year end compliances and filings.

VSTN has compiled a document outlining the various timelines for Indian Transfer Pricing Compliances for the benefit of readers.

Open Attachment…

TRANSFER PRICING COMPLIANCE TIMELINES

Compliance	Section under Indian Income-tax Act, 1961	Form Number	Applicability	Due Date	Penalty for non-compliance
Transfer Pricing Certificate	92E	3CEB	All the international transactions irrespective of value (OR) If the total value of Specified domestic transactions entered exceed INR 20 Crores	31-Oct-2025	INR 1,00,000/-
Transfer Pricing Documentation	92D	–	The aggregate value of international transactions exceeds INR 1 Crore (OR) If the total value of Specified domestic transactions entered exceed INR 20 Crores	31-Oct-2025	2% of value of international transactions
Master File (One pager form)	92D (4)	3CEAA (Part A)	All the Indian entities part of Multinational Group Irrespective of applicability of TP	30-Nov-2025
Master File (Detailed form)	92D (4)	3CEAA (Part B)	Part B is applicable if following conditions are satisfied: Consolidated Group Revenue exceeds INR 500 Crores AND Aggregate value of all International Transactions exceeds INR 50 Crores, or the Intangible Property related International Transactions exceeds INR 10 Crores	30-Nov-2025	INR 5,00,000 for non-furnishing of information and documentation
Intimation by Designated Constituent Entity (DCE) – Master File Designation Form	92D (4)	3CEAB	Applicable to Indian entities meeting the above threshold and having more than one entity in India	31-Oct-2025

TRANSFER PRICING COMPLIANCE TIMELINES

Compliance	Section under Indian Income-tax Act, 1961	Form Number	Applicability	Due Date	Penalty for non-compliance
Intimation by DCE- CbC Notification (having HQ/ Alternate reporting entity outside India and filing the CbCR outside India)	286 (1)	3CEAC	The bilateral exchange relationship for the automatic exchange of CbC Reports between tax authorities of Parent Entity/Alternate Reporting Entity Jurisdiction and Indian jurisdiction is activated	Ten months from the end of reporting Accounting year of the HQ/ Alternate reporting entity (For Example, if the accounting year of the HQ/ Alternate reporting entity is 31 December 2024, then the due date for filing 3CEAC is 31 October 2025)	INR 5,00,000 – Furnishing of inaccurate information in CbCR INR5,000 / 15,000 / 50,000 per day for non-furnishing of CbCR – Depending on the days of delay of violation
Country-by-Country Reporting (CbCR)- India HQ/Alternate reporting Entity	286 (2)	3CEAD	If Consolidated Group Revenue for preceding accounting year exceeds INR 6,400 Crores.	12 months from the end of reporting Accounting year of the HQ/ Alternate reporting entity (For Example, if the accounting year of the Indian HQ/ Alternate reporting entity is 31 March 2025, then the due date for filing 3CEAD is 31 March 2026)
Safe Harbour Application for International Transactions	92CB	3CEFA	Applicable to only Indian entities. Various thresholds prescribed based on the activities of the Indian entity	30-Nov-2025	Not Applicable
Safe Harbour Application for Specified Domestic Transactions	92CB	3CEFB	Applicable to only Indian entities. Various thresholds prescribed based on the activities of the Indian entity	30-Nov-2025	Not Applicable

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

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Transfer Pricing – UAE – Interest Deduction

Transfer Pricing – UAE – Interest Deduction Limitation Rules

The FTA on 07 April 2025 issued a guide detailing on limitation of interest deduction in the Taxable income in the Corporate Tax return. The Guide covers various aspects on limitation of interest deductions including:

Definition of interest, including payments economically equivalent to Interest
Rules on general deductibility of interest
Specific Interest Deduction Limitation Rule
General Interest Deduction Limitation Rule including interaction of the General Interest Deduction Limitation Rule with certain special cases
Exceptions to General Interest Deduction Limitation Rule.

This alert summarises each of the above areas and captures key aspects that the businesses will have to bear in mind while considering interest deduction.

Open Attachment…

UAB Interest deduction Limitation Rules

FTA Guidance

April 2025

Background

The Federal Tax Authority (FTA) on 07 April 2025 issued a guide on interest deduction limitation rules. The Guide is to aid taxpayers on the aspect of deductibility of interest while computing the Taxable income. Broadly, the guide covers definition of interest (including payments economically equivalent to interest), elaborates on general & specific interest deduction limitation rules, carry forward & utilization of net interest expenditure and interaction of these limitation rules with other aspects of Corporate Tax. The Guide underlines that limitation rules ensure interest deductions does not erode UAE’s tax base.

This alert summarizes the key aspects of the Guide in the following sections.

Interest and its Types

The UAE Corporate tax law defines interest as:

Any amount accrued or paid for the use of money or credit (overdraft),
discounts, premiums,
profit paid for an Islamic financial instrument,
other payments economically equivalent to interest,
any other amounts incurred in connection with the raising of finance, excluding payments of the principal amount.

The key points in connection with interest are as follows:

Interest can be recognised either on accrual or cash basis. Interest can be in consideration of loan or credit facility (such as overdraft facility).
Loan issued on discount or premium would be part of interest expense. However, certain line items such as trade / volume discounts, sales promotion & rebates, premium / discount on equity instruments or loyalty points / rewards will not be considered as interest.
Islamic financing structures use different nomenclature such as profit or mark-up. This element of ‘profit’ or ‘mark-up’ is economically equivalent to interest, irrespective of treatment under IFRS. Examples include Mudarabah, Ijara, Sukuk, Istisna and Salam.
Payments economically equivalent to interest include the following:
1. Any penalties or higher interest charges due to default – for non-performing debt instrument.
2. In a sale and subsequent repurchase agreement of securities, the differential i.e., the price higher than original price
3. Fee paid by borrower in case of a stock lending agreement
4. In Hire purchase, the implicit interest as per IFRS. However, cancellation charges incurred due to the early termination of a hire purchase is not treated as interest.
5. The finance element in case of non-finance lease
6. Factoring fees in case of factoring or similar transactions
Foreign exchange loss depreciation of functional currency against the loan currency between the accrual and payment of interest would be treated as interest
Charges in relation to late / non-payment of statutory dues will not be allowed as interest.
Guarantee fees, arrangement fees or commitment fees will be considered as interest.
Any fees paid in connection with raising finance will also be treated as interest viz., underwriting fees, legal and professional fees, early or pre-payment of loan

Deductible Interest expenditure

Business expenses, including interest, is allowed as a deduction while computing taxable income for a taxpayer. Expenditure follows accounting classification as per IFRS (or IFRS for SMEs), as the case maybe. In the following cases interest expense will not be deductible:

Interest not wholly and exclusively incurred for the purposes of the taxpayers business –Example where loan taken by business is used for the personal benefit of Director.
Expenditure is capital in nature
Interest payments relating to deriving Exempt Income
Interest payments to connected persons / related parties more than the market value

Specific Interest deduction limitation rule

Specific Interest Deduction Limitation Rule has been introduced to prevent misuse of financial transactions between taxpayer and its related parties / connected persons. It is important to note that specific interest deduction limitation rule applies after the abovementioned deductible interest expenditure rule, including application of the arm’s length principle – but before application of the general interest deduction limitation rule (enumerated in the following section). In this limitation rule, interest w.r.t. loan from related party / connected person is disallowed w.r.t. following transactions:

Dividend or profit distribution to a Related Party
Redemption, repurchase, reduction or return of share capital to a Related Party
Capital contribution to a Related Party
Acquisition of ownership interest in a Person who is or becomes a Related Party after acquisition

However, specific special interest deduction limitation rule is subject to “main purpose test”. That is specific interest deduction limitation rule will not apply where the main purpose of obtaining the loan and carrying out one of the transactions listed in 1-4 above is not to obtain Corporate Tax advantage. The definition of Corporate tax advantage includes:

Obtaining a refund / higher refund of corporate tax
Avoidance or reduction of corporate tax payable
Deferral of corporate tax payment or advancement of refund
Avoidance to deduct or account for corporate tax

Note: The onus is on the taxpayer to demonstrate that the main purpose is not to gain a Corporate Tax advantage.

Further, where the related party is subject to effective tax rate of 9% in a foreign jurisdiction, no corporate tax advantage is deemed to be arise.

General Interest deduction limitation rule

To prevent abuse of debt financing to reduce tax base of UAE, general interest deduction limitation rule has been introduced. This rule states that where any taxpayer ‘s net interest expenditure exceeds AED 12 million in a tax period, the amount of deductible interest would be greater of

30% of EBITDA, or
de minimis threshold – AED 12 million

The explanation for various terms is provided below:

Net Interest Expenditure – Interest expenditure incurred including any carried forward Net Interest expenditure less interest income derived during the tax period. This would be adjusted for the following:

Adjust	Particulars	Amount in AED
Add	Items not included as interest for accounting purposes but treated as Interest expenditure	xxx
Less	Items not included as interest for accounting purposes but treated as Interest income	(xxx)
Less	Interest disallowed under any corporate tax law including arm’s length principle and specific interest deduction limitation rule	(xxx)
Less	Net Interest Expenditure related to grandfathered debts	(xxx)
Less	Net Interest Expenditure related to Qualifying infrastructure projects	(xxx)
Subtotal	Net Interest Expenditure for the relevant Tax period (before carry forward net interest expenditure from previous years)	xxx
Add	Net Interest Expenditure carried forward from previous 10 tax periods	xxx
Total	Net Interest Expenditure for the relevant Tax Period	xxx

EBITDA – Earnings before the deduction of Interest, tax, depreciation and amortization

Adjusted EBITDA – The computation of adjusted EBITDA would be as follows:

Adjust	Particulars	Amount in AED
	Net profit (loss) as per financial statements (i.e., Accounting Income/(loss))	xxx /(xxx)
+/-	All adjustments as per Article 20 of Corporate Tax, except general interest deduction limitation rule	xxx /(xxx)
+	Depreciation expense (In case interest capitalized forms part of depreciation, the said capitalized interest to excluded)	xxx
+	Amortization expenditure	xxx
+	Net Interest Expenditure (before carry forward from previous years)	xxx
+	Net Interest Expenditure relating to grandfathered debt instruments	xxx
+	Net Interest Expenditure relating to Qualifying Infrastructure Projects	xxx
Total	Adjusted EBITDA	xxx
	30% of Adjusted EBITDA

Note: Where adjusted EBITDA is negative, it would be treated as 0

Carry forward and Utilization – The net interest expenditure disallowed in a tax period can be carried forward and utilized in the subsequent 10 tax periods. The carry forward would take place in the order in which it was incurred under the ‘first in, first out’ principle. For example, a taxpayer has AED 10 million as net interest expenditure carried forward from 2025. In 2026, this carry forward interest would be first deducted followed by the net interest expenditure incurred in 2026. In case of disallowance on account of application of general interest deduction limitation rule, the interest for 2026 will be first disallowed, followed by any carry forward net interest expenditure.

Special Cases

Interaction of General Interest Deduction Limitation Rule with certain special cases is summarized below:

Exempt Persons

Business activities undertaken by exempt persons are subject to corporate tax including application of general interest deduction limitation rule. Where interest is not directly identifiable or attributable to business that is taxable, interest has to be apportioned on a “fair and reasonable” basis.

Non-Resident Persons

For income attributable to PE or to a nexus in UAE in case of a non-resident, general interest deduction Limitation will apply. Where the PE or nexus of non-resident is interrupted i.e., it ceases to taxable person, any carry forward of unutilized net interest expenditure will be cancelled / forfeited. Even where the non-resident has income attributable to PE / nexus in UAE for the later years, such unutilized net interest expenditure will stand cancelled.

Cash basis of accounting

Taxpayers may opt for cash basis of accounting where the revenue does not exceed AED 3 million in a tax period, and interest is deductible on payment of interest – subject to specific and general interest deduction limitation rules.

Exemptions to General limitation rule

The following are the exceptions to the application of the general interest deduction limitation rule:

Banks
Insurance providers
Business activities by natural persons
any other Person as may be determined by the Minister (currently no persons have been specified)

Where Banks or insurance companies are part of a tax Group, any interest expenditure or income attributable to such bank / insurance providers is not considered for the purpose of computing net interest expenditure or EBITDA. The aforementioned exception does not apply to captive insurance companies, treasury companies or other non-regulated financial entities.

Historical Financial Liabilities

Debt instruments / liabilities with terms agreed upon before 9 December 2022 are defined as pre-existing debt instruments or liabilities / historical financial liabilities. For such historical financial liabilities net interest expenditure will not be subject to the general interest deduction limitation rule. This includes agreements where their sole purpose was to hedge against interest risk, can be entered into either before or after 9 December 2022.

Where principal of a historical financial liability includes certain undrawn value, the net interest expenditure will not be subject to general interest deductions limitation rules only where the lender was legally required to provide the funds upon completion of deliverable / project phase and it is agreed prior to 9 December 2022. It should not be merely at the request of the borrower.

For historical financial liabilities, net interest expenditure attributable is lower of:

actual net interest expenditure that arises in the Tax Period or
net interest expenditure that would arisen as per the terms as at 09 December 2022.

Note: Historical financial liabilities would be subject to general rules for deduction i.e., wholly and exclusively for the business, should not be capital expenditure, etc.. It would also be subject to specific Interest Deduction Limitation Rule.

Qualifying Infrastructure Projects

A person undertaking (i.e., into provision, maintenance or operation) a qualifying Infrastructure Project or undertakes activities that is ancillary or facilitates undertaking of a qualifying Infrastructure Project is defined as a qualifying Infrastructure Project person. Such qualifying person may undertake another business activity as well.

A qualifying person undertaking qualifying infrastructure project is not subject to the general interest deduction limitation rule.

Qualifying Infrastructure Project is one that satisfies all of the following conditions:

exclusively for public benefit of UAE.
exclusively for the purposes of transport, utilities, education, healthcare or any other service within the UAE,
its assets may not be disposed of at the discretion of the relevant Qualifying Infrastructure Project Person,
the assets provided, operated or maintained by the project should last, or be expected to last not less than 10 years,
all its assets must be situated in UAE, and
its Interest income and Interest expenditure must arise in the UAE.

Note: Net interest expenditure arising for a qualifying person engaged in business unrelated to qualifying infrastructure project would be subject to general interest deduction limitation rules.

Small Business Relief

Taxpayers electing under small business relief cannot deduct Net Interest expenditure and will not be eligible to carry forward any net interest expenditure. However, when the taxpayer was not under the small business relief & net interest expenditure was disallowed under general limitation rule, the carry forward period would be paused during period in which the taxpayer had subsequently elected under small business relief. For example, where taxpayer has disallowance under general limitation rule in 2024 and elects under small business relief in 2025 and 2026, the net interest expenditure can be carried forward upto 2036.

Key takeaways

The Guide on interest deduction limitation rules provides detailed explanation on various elements of interest expense as well as deductibility or non-deductibility of the said expense in various instances, including various illustrations. The Guide aligns with the Action Plan 4 of the BEPS (Base Erosion and Profit Shifting), 2015 issued by the OECD – wherein UAE has adopted the Fixed ratio rule viz., 30% of EBITDA.

With closure of CY 2024 as well as FY 2024-25 this Guide would throw light on deductibility of interest expenses and would aid taxpayers evaluate their financial transactions in light of filing the corporate tax return.

About us

VSTN Consultancy Private Ltd is a Global Transfer pricing firm with extensive expertise in the field of international taxation and transfer pricing. VSTN Consultancy has been awarded by International Tax Review (ITR) as Best Newcomer in Asia Pacific – 2024 and is recognised as one of the finest performing transfer pricing firms. VSTN also an international office in Dubai.

Our offering spans the end-to-end Transfer Pricing value chain, including design of intercompany policy and drafting of Interco agreement, ensuring effective implementation of the Transfer Pricing policy, year-end documentation and certification, Global Documentation, BEPS related compliances (including advisory, Masterfile, Country by Country report), safe harbour filing, audit defense before all forums and dispute prevention mechanisms such as Advance Pricing agreement.

We are structured as an inverse pyramid where leadership get involved in all client matters, enabling clients to receive the highest quality of service.

Being a specialized firm, we offer advice that is independent of an audit practice, and deliver it with an uncompromising integrity.

Our expert team bring in cumulative experience of over seven decades in the transfer pricing space with Big4s spanning clients, industries and have cutting edge knowledge and capabilities in handling complex TP engagements.

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

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Transfer Pricing – ITR World Tax – Mining Sector

Transfer Pricing – ITR World Tax – Mining Sector – Impact of Interest Deductions in Developing Countries

VSTN recently published a transfer pricing article in ITR Worldtax, leading Tax forum, on the mining sector titled “Mining sector – Impact of Interest deductions in developing countries”, coauthored by Nithya Srinivasan and Saranya Nagarajan.

The article dwells on thin capitalization regulations – BEPS – Action plan 4, in light of the mining sector, specifically the regulations in the developing countries and its impact on MNE Group.

The article concludes with the key takeaways for MNE Group to bear in mind while they set-out to expand their operations in the mining sector – especially in the developing countries.

Open Attachment…

Mining sector – Impact of Interest deductions in developing countries

08 April 2025 | by VSTN Consultancy

Tags: VSTN Consultancy India

A. Introduction:

In the current era, developing economies play an important role as they contribute to more than half of the global GDP. Global economy is moving at a slower pace and the growth is expected to stabilize at 2.7%[1] in FY 25-26. Although, the global financial conditions have eased slightly, the growing debt-service burdens continue to pose considerable threat to the economic activities in developing countries. Borrowing costs remain far higher than in the 2010s in developing countries ever since the impact of covid19. Further, concerns over trade relations with United States, policy rate cuts and increase in political uncertainty in developed economies are holding back investor optimism in the recent times.

In light of the above economic scenario, asset intensive industries face funding challenges due to high initial costs, long payback periods and the need for significant capital expenditures, making them vulnerable to economic slowdowns. Such industries face various challenges to secure finance since traditional lenders like banks are hesitant to provide large loans to these industries owing to high risk and long payback periods.

Mining industry is one such capital-intensive industry where requirement of funds during the acquisition & exploration stages is generally high. Due to uncertainty in the mining outcome, many resource-rich countries across the world face financial difficulties during the exploration phase since the chances of obtaining funds from external sources are remote.

Therefore, developing economies with rich mineral resources source funds from Parent/Group or Related parties (‘RPs’) in developed countries to fund their mining operations. Given that substantial funding is required for a mining company and given the fact that it could be primarily financed by an RP, the provisions limiting excessive interest deductions are likely to be an impediment.

This article discusses about mining sector and the impact of excessive interest deductions in mineral rich developing countries.

B. Funding Alternatives for MNE’s in mining sector:

MNE’s engaged in mining activity assume considerable risk as the investments in exploration may not yield a worthwhile discovery every time. There are various stages involved in the mining activity and the financing requirements for each stage is different. The following are the stages of mining life cycle:

Acquisition & Exploration

Development & Construction

Mining Extraction

Smelting, refining and Sales

Closure & restoration

High-risk activities are undertaken in mining industry since the investors might realise returns only if the exploration leads to profitable mining operations. However, if the exploration is unsuccessful, significant amount of capital to sustain the operations would be required till the realisation of revenue from mining operations. Considering the above factors, debt-based funding is often considered suitable because it allows the entities to access funds without diluting the ownership, offering a predictable repayment structure thus making it a valuable tool to manage cash flow and facilitate growth while maintaining control over the company. While large MNE’s raise funds through external sources, small and medium MNE’s seeking ad-hoc financing largely rely on the RPs.

Various factors like credit rating, nature of minerals mined, level of risk, assets offered for security, requirement of ad-hoc finance, etc influence the external sourcing abilities of small and medium MNE’s. Further, changing market conditions has a bearing on the existing financial products (i.e. change in the ARR/SOFR rates), thus, narrowing down the funding options for the large MNE’s as well. Therefore, securing funds from the RPs is often considered as the most feasible option.

Most MNE’s optimise their overall funding by carrying out centralised financing functions through a finance hub which provide various financial services to its group entities and which provides them with the best tax arbitrage. The financing entities of the Group aids its subsidiaries by:

a) Providing internal loans;
b) Cash Pooling;
c) Supervision of cash flows;
d) Collateral/Guarantee for loan;
e) Hedging

Examples of various financing arrangements

C. Interest Deductions and BEPS Action Plan 4:

Financial services amongst the group entities are of relatively high transfer pricing vulnerability considering the volume of financing for a mining business and given the fact that minor mispricing could have a material impact on the profitability. The developing countries with high tax rates face higher risk since the MNE’s tend to charge higher interest and shift profit legitimately.

BEPS Action Plan 4 sought to address such excessive interest deductions and counter profit shifting. This action plan recommended introducing provisions in the countries’ domestic laws to address the following base issues:

Dis-proportionate allocation of debt by MNE’s amongst the group entities;
Interest rates that are inconsistent with the market i.e. non-arm’s length interest rates;

The BEPS recommended approach ensures that the entity’s net interest is directly linked to the taxable income under three parts namely:

Capping Interest deductions (‘Fixed Ratio Rule)- Allows a company to deduct interest upto a certain limit while computing taxable income.
Group wide approach (‘Group Ratio Rule)- this allows an entity of the Group to deduct more interest based on the Group’s worldwide position.
Specific rules (‘Targeted rules’) – specific rules targeted to prevent excessive interest payments

Considering the significance of the interest deductions in mining sector, OECD issued a practice note on ‘Limiting the Impact of Excessive Interest deductions on Mining Revenue’, to assist the tax authorities to identify MNE’s who use debt as a tool to shift profits.

Several measures recommended by the OECD impose restrictions on excessive interest deductions such as below

Measures	OECD Guidelines/Recommendations
Thin Capitalisation	Directly set limits on capital structure of MNE’s Expressed as ratio of relative level of debt to equity. Any interest beyond the debt equity limits were denied; Fixed Ratio Rule recommended 10-30 percent as benchmark net interest on EBITDA
Interest Rate Caps	Aimed to impose a cap on interest payments made to RPs (eg. LIBOR/SOFR plus 500 bps), to address unreasonably high interest rate mark-ups by MNE’s.
Anti-abusive provisions	Provisions set to address specific areas in tax laws and assist tax authorities to identify and penalise complex business arrangements. Introduced to prevent tax avoidance by evaluating the real economic effect of a transaction.
Proportionate Adjustment	Limitation on interest deductions based on differences between local and foreign rates, have been imposed by certain countries.
Transfer Pricing Rules	Tranfer Pricing Rules targeted to ensures that the international transactions between RPs are at arm’s length.

D. Introduction of Thin-cap rules in developing countries:

In line with the guidelines issued by the OECD, India introduced thin-cap rules vide section 94B of the Income Tax Act, 1961. Section 94B specifically targets excessive interest deductions by limiting the deductibility of interest paid by an Indian company to its RPs. The deduction is restricted to 30% of the earnings before interest, tax, depreciation and amortisation of the Indian entity and the provisions are applicable for payments exceeding INR 10 million. This aligns India’s tax regime with the BEPS guidelines and ensures that the Indian tax system does not fall prey to MNE’s aggressive tax avoidance strategies.

Similarly, most of the countries (both developed and developing countries) introduced thin-capitalisation rules, which, not only limit international debt-shifting but could also impact their real economic activity. Most European countries have pre-tax interest limits in place i.e. limit set to 30% of EBITDA. In Srilanka, the interest in relation to debt exceeding 3 times the equity is disallowed while computing taxable income. Likewise, the African country has set benchmark debt-equity ratio as 3:1. Similarly, interest payments for debts exceeding the debt-equity ratio of 3:1 limit is disallowed in Japan.

E. Impact on Mining Sector in developing countries:

The developing countries, in an endeavour to attract FDI in mineral exploration, have formulated various fiscal incentives and tax holidays, however, excessively restrict certain financing arrangements. MNE’s therefore, continuously optimise their businesses on global scale resulting in significant restructuring and restricting flow of FDI into the country.

Mineral rich developing countries are therefore in the process of rephrasing their local regulations adhering to OECD’s recommendations and also carefully considering the benefits and costs of entering into DTAA’s with developed countries.

Furthermore, the following critical factors also needs to be considered by MNE’s while entering into financing arrangements:

a) Debt-equity ratio – Companies with disproportionate debt-equity levels are prone to high financial risks, which might be viewed as a red-flag from investors perspective;
b) Non-arm’s length interest rates – Related party interest rates, if inconsistent with the market rates might lead to potential transfer pricing issues;
c) Complex structures – MNE’s tend to formulate complex structures to finance the group entities – this might lead to tax issues in case any revenue leakages/base erosion issues are identified by the tax authorities.

F. Key Takeaways for MNE’s:

Though sector-wise tax policies are usually not being implemented by the policy-makers because of its limited applicability, if mining industry contributes to a significant portion of the country’s economy, special rules relating to such sector might be introduced in such countries in line with OECD’s recommendations. Provisions favourable to mining industry are often embedded in the corporate tax systems in various countries. Such sector specific incentives might be in the form of:

Waving/deferral of mineral royalties
Tax holidays for a specified period/based on quantity extracted basis
Special capital allowances
Indirect tax exemptions

MNE’s should consider the following points while evaluating on the region/location to set-up/expand its mining operations:

Although TP legislation exists in all developing countries, tax authorities might lack knowledge of mining industry , and as a consequence, certain issues may not be fully addressed. Therefore, maintenance of appropriate documentation is the key;
The transfer pricing documentation should clearly differentiate between the routine and unique services to ensure that appropriate transfer pricing methods have been applied for substantiating the intra-group transactions;
Consider understanding the regional tax laws to determine whether adequate carry forward provisions are available for mining entities to mitigate cash flow issues due to timing mis-match between development & production stage of mining life-cycle;
Be aware of the country’s thin cap rules to understand the maximum allowable level of debt;
Drop in the prices of the commodity might have a major impact on mining industry which could hinder the lending/ borrowing conditions of MNE’s. Therefore, risk-mitigated approach should be adopted while drafting inter-company financing agreements, for eg: interest rates should be linked to market conditions/commodity prices; and
Ensure that the inter-company pricing policies are consistent with the arm’s length principles i.e. whether the terms & conditions of related party transactions are similar to those entered under uncontrolled circumstances with unrelated parties in the absence of MNE’s influence.

Contributed by Nithya Srinivasan and Saranya Nagarajan

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

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Transfer Pricing – CBDT Update FY 2024-25

Transfer Pricing – APA Conclusions – CBDT Update – FY 2024-25

As the financial year came to a close yesterday, the Central Board of Direct Taxes (CBDT) has issued a press release with the statistics of APA conclusions during the FY 24-25. It has been a record year for the APA and some of the key highlights are as below.

Highest number of APAs signed in a single year since the scheme’s inception (174 APAs signed during FY 24-25), which is a 39% increase from FY 23-24
Highest number of BAPAs finalised in any year (Out of 174 APAs, 65 were BAPAs i.e. almost 40% of the APAs signed during FY 24-25), which is a 67% increase from FY 23-24
Highest number of APAs signed on a single day (34 APAs on 27 March 2025)
India’s first MAPA (Multilateral APA i.e. with more than two countries involved) signed

The BAPAs were majorly signed with India’s treaty partners Australia, Japan, South Korea, Netherlands, New Zealand, Singapore, UK and US. This has brought the total number of APAs signed since inception to 815 (615 UAPAs, 199 BAPAs and 1 MAPA). A copy of the press release is appended here.

The consistent increase in conclusion of APAs in India (From 95 in FY 22-23, 125 in FY 23-24 to 174 in FY 24-25) is encouraging for taxpayers and demonstrates the CBDT’s commitment in reducing the inventory of pending APA applications and providing tax certainty. Further the signing of the first MAPA is significant and should hopefully open doors for filing of many more MAPA applications.

While the threshold for Safe Harbour has been increased recently to INR 300 crores, there has been no significant inclusion/change in transactions covered, and hence APA would continue to be a viable option for taxpayers for dispute prevention and resolution, for varied complex nature of transactions.

The US IRS has also recently issued its annual APMA report which specified that the highest number of BAPAs executed during 2024 was with India (29%), which shows that India was a significant party in the US APA programme with successful interactions between the Competent Authorities.

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