Two changes have taken place in the Indian transfer pricing rules during the last two Budgets — one on information sharing with tax authorities around the globe under BEPS and the other, on secondary adjustments.
Secondary adjustment rules, brought in in 2016, aimed to shore up foreign exchange. They stated if there was any adjustment either during tax audit or Advance Pricing Agreement (APA) or Mutual Agreement Procedure (MAP), the Indian subsidiary of the foreign firm would be obliged to bring an equivalent amount of that adjustment from its foreign entity and then pay tax on that adjustment. Earlier, the Indian subsidiary could pay for the higher tax demand, due to audit etc., from its own funds, and that meant a depletion of its funds. While the industry has meekly resisted the rule, the objection is to the form.
The Indian rule considers any default in bringing in the money as a loan and hence considers levy of interest. Other countries, such as the U.S. and Australia, which also have similar rules, consider this a one-time levy attracting no interest. Thus, Indian rules are out of step with international practices. The industry has raised this issue with the government during pre-Budget consultations.
Tax vs forex
It may be further added that with forex reserves of $414 billion, equivalent to 10 months of imports, tax laws cannot be a vehicle for augmenting forex reserves. There is no major debate on the rule per se, but it is certainly about on the method. Charging interest on interest can hardly be ‘good’ law. We hope the Finance Minister corrects this and brings it in line with the international practices.
Introduction of country-by-country (CbC) and Master File reporting requirement for multinational enterprises (MNEs), as per the country’s BEPS commitment, can again be hardly resisted by the companies. But making the rules and forms more demanding in information than other comparable economies puts Indian rules out of step with the BEPS global standards. It also places extra compliance burden as well as fear in the mind of the MNEs in India, which is certainly not in line with the government’s objective of improving ease of doing business.
One such example is the threshold for filing Master File in India is $75 million (€65 million), whereas the globally adopted threshold is much higher, barring some European countries. Besides, countries such as the U.S., the U.K., Singapore, South Africa and Canada do not have Master File requirements as of now.
Another issue worth mentioning is the global information exchange under the BEPS recommendation.
Many countries, for example Australia, are ready to allow some room in the first year of CbC and Master File reporting; India has already brought in laws which impose penalties for not filing information on time, irrespective of whether the residence country of the MNE has that requirement or not. Information requirements in India are also much more than envisaged in OECD recommendations. All these put extra onus on MNEs.
Industry certainly hopes that some of these rules would get benchmarked with the global standards in Budget 2018.
(Sanjay Kumar is Senior Director and Chhavi Poddar is Senior Manager with Deloitte Haskins and Sells LLP. Views are personal.)
