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Transfer Pricing Law - Reflections & Prejudices
The last few weeks saw Indian media debating on how multinational corporations are at logger heads with Indian Revenue in relation to shifting profits out of India. In the world of taxation this concept of transfer pricing is amongst the more popular topics. Recent headlines captured names of global IT heavy weights like IBM, Accenture and Capgemini assumingly indulging in under-reporting revenues (in India) by shifting profits using transfer pricing. These transfer pricing adjustments are being disputed in various appellate forums and hence have not attained finality. More importantly, such news tends to question corporate integrity and governance of significant investors. On the other hand, international tax media has severely criticised India for its handling of transfer pricing disputes, labeling us as amongst the most difficult tax jurisdictions. Taxand India gives its view on Indian Transfer Pricing regulations and the complexity of the impact on businesses.
Rapid integration towards best practices
Distinction between tax planning and tax avoidance has always been blur. Answers to questions on morality and ethics require more ink and space. Hence rather than rushing to any conclusion, Taxand are keen to objectively reflect on the current state of flux. Indian Transfer pricing regulations have been in place for over a decade now. Tax issues have been keeping pace with complexities of the business world and this borne out with the current quantum of disputes. Having being closely involved with various task forces on formulation of transfer pricing law, I am glad to see the steep learning curve displayed by both the Indian Revenue and taxpayers. The scene is no different at the global arena wherein organisations like OECD and UN are working hard to provide guidance on this evolving and challenging issue.
Are we truly aligned?
India's views to aligning itself with global thought leadership initiatives have not been very encouraging. Reasons are varied. India is uniquely placed on the economic growth curve and this makes it difficult to strike similarities and differences between both the developed and developing world. Also, the historical framework of Indian tax regulations has been a cocktail of concepts developed by common law, UN and OECD countries. Of course, there is a desi (Indian) flavor to everything. Thus, moving to an OECD based system (which has been a popular debate recently) is a job easier said than done. For instance, couple of years back, NASSCOM created a common platform to address the growing transfer pricing litigation through introduction of safe harbors. Safe harbor simplistically means that the Government would provide indicative price points (or margins) for transactions between group entities. The objective was to reduce transfer pricing litigation for MNCs operating in this space. Government on its part moved forward and legislated requisite amendments in the Budget of 2010. Real issues surfaced when taxpayer and Revenue sat together to determine a mutually accepted safe harbor. Given the wide variance in the ground level understanding of transfer pricing aspects, safe harbor limits proposed were so different that no consensus could be reached. Another instance of a wise and well legislative move frustrating its implementation
Does the truth lie in the middle?
Given where India's transfer pricing regulations are poised, there is ample space for alternate interpretation and views to surface. With over a decade of law, there is no administrative guidance. Jurisprudence by way of decided cases is often contradictory and confusing. Representations to issue white papers (a common practice followed by OECD nations) and / or constitute national tribunal bench have not been implemented. The outcome is that India leads the pack on transfer pricing disputes.
But all is not lost
Taxpayers and Revenue have to introspect on rationality of their arguments. There may well be cases wherein the Indian captive center has over the years moved up the value chain but is still being paid meagerly. Similarly, there are situations wherein vanilla call centers or software testing units are expected to earn margins equivalent to Indian giants like Wipro and Infosys. With such wide gap in thinking, there is little scope for negotiation and reconciliation.
My way or the highway syndrome
One of the reasons for such rigid attitude is the tax amount at stake. The latest figure is believed to be Rs 22,000 Crores. Of course, with these numbers situation is bound to be stressed. One possible defusing factor could be alternative dispute resolution channels such as Competent Authority Settlement as provided under numerous tax treaties that India has signed with other sovereign nations. While there have been few instances of settlements, from a macro perspective success has been limited. An alternative view has been adoption of mandatory arbitration as an avenue to close disputes.
It is also early to predict the outcome of the Advance Pricing Agreement - an alternative to transfer pricing litigation prescribed under the proposed Direct Tax Code. While these channels have their pros and cons, a fundamental change is required to reduce the mistrust between taxpayers and the Revenue. This can happen only if both taxpayer and Revenue come forward and are open to re-visit their tax positions. Tax and economics are no exception. The future of taxation in India should be in embracing best practices to encourage foreign investment. Litigation cannot be the future of tax law. Unfortunately, in the current landscape, this is not correct. Given the global slowdown, these are turbulent times for MNCs and hence India requires greater restraint before pointing fingers.
*First published in the Business Law column of the India Business Standard, 12 September 2011.
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