The Transfer Pricing Act was introduced in India in April 2001. Since its introduction, transfer pricing has become the most significant international tax issue for multinational companies operating in India.
India has detailed compliance and reporting requirements to ensure that taxpayers report their related party transaction in the prescribed transfer pricing form and retain prescribed documentation to demonstrate that related party transactions were carried out under arm’s length conditions. In addition, India has also introduced the requirement to maintain a global master file and a country-by-country report, in line with the results of the OECD Base Erosion and Profit Shifting project. These compliance requirements are critical because they provide tax administrators with the ability to understand taxpayers’ businesses and conduct an informed assessment and audit of transfer pricing risks.
Since its introduction in 2001, the government has announced several measures to streamline transfer pricing provisions. Few of these notable measures include the introduction of the range concept, the introduction of safe harbor rules, and the risk-based selection of cases for review. While these measures have brought India closer to global best practice, some provisions of India’s transfer pricing regulations need to be amended to improve India’s tax and transfer pricing competitiveness.
Twenty years of transfer pricing administration should be an opportune time to re-examine certain requirements and assess whether any of them have lost their usefulness and can be removed, without compromising the policy objectives behind their introduction. Moreover, the Union budget 2022-2023 is expected to be presented on February 1, 2022. This is therefore the right time to highlight these measures.
This article focuses on three such compliance measures:
1. Delete certification requirement: Currently, all taxpayers entering into related party transactions are required to prepare a detailed transfer pricing disclosure form and have it certified by an independent accountant. The independent accountant is required to decide whether the prescribed documentation has been kept and whether the information contained in the form is “true and correct”.
The purpose of such a form is to ensure that a taxpayer does not fail to disclose a related party transaction. In addition, it also provides the tax administration with sufficient information to apply risk parameters for the selection of cases to be examined.
It is very common for countries to seek information on related party transactions either through a separate transfer pricing form or through an annex to the tax return (e.g. China, Australia, Indonesia, United States, Spain, etc.). However, only a few countries (eg Bangladesh and Saudi Arabia) require taxpayers to obtain a certificate from an independent accountant. Even Sri Lanka had such a requirement before, but recently removed it.
India should replace this independent accountant certification with self-certification by the taxpayer. If the idea of obtaining such a certificate is to ensure that taxpayers do not fail to disclose a reportable transaction, the current penalty of 2% of the value of the undisclosed transaction should act as an adequate deterrent to taxpayers..
2. Remove compliance for non-residents: The transfer pricing provisions require compliance from a non-resident taxpayer if it derives taxable income from transactions with its related party in India. This is despite the fact that the Indian entity is already required to report the same transaction and justify that it was established under arm’s length conditions.
India is probably the only country in the world to have such a requirement. This requirement can be removed as it leads to duplication of effort.
Non-residents should be excluded from the scope of transfer pricing compliance in India, provided that their Indian related party has undertaken the required compliances with respect to the same international transaction.
The Finance Act 2020 exempts non-resident taxpayers earning certain prescribed categories of income from filing the income tax return in India, provided that taxes have been duly withheld from such taxable income in accordance with Indian income tax law. Income. However, corresponding changes have not been made to the transfer pricing provisions. Therefore, a situation arises where a non-resident exempted from filing a tax return in India would still need to comply with the transfer pricing provisions. At a minimum, these non-residents should be exempt from transfer pricing compliance..
3. Increase the compliance threshold: Currently, taxpayers with international related party transactions exceeding INR one crore are required to maintain detailed transfer pricing documentation. This threshold limit is extremely low and has remained the same over the past two decades. Raising the threshold will significantly help eliminate the obligation for small taxpayers to comply with these requirements.
Over the past few years, India has introduced various measures to bring its transfer pricing regulations in line with global best practices. However, the changes suggested above will go a long way to relaxing compliance requirements without diluting the policy objective behind their introduction.
About the Author: Jitendra Jain is a Professional Chartered Accountant.
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