Transfer pricing regulation crucial to stopping MNCs from shifting profits out of India says Pranab Mukherjee
The Finance Minister Shri Pranab Mukherjee inaugurated an International seminar on transfer pricing, here today. Transfer pricing is a major international tax compliance issue as multinational entities tend to set transfer pricing on cross-border transactions to reduce taxable profits. Being organized by CBDT and OECD from 17th to 19th February 2010, the seminar is a part of capacity building of transfer pricing resources in India and aims to discuss various important issues of transfer pricing like intangibles, cost sharing arrangement, etc.
In his inaugural address, Shri Mukherjee stated that special set of Transfer Pricing Rules created among developing countries with the assistance of the Organization for Economic Cooperation and Development (OECD) help to prevent companies from using transfer pricing to avoid taxes. The framing of Rules for transfer pricing purposes, which allocates profit to tax jurisdictions is an important area which needs cooperation and consultation amongst south-south countries and also amongst north-south countries to have a broad guideline to prevent tax disputes amongst the countries, said the Minister. The Finance Minister expressed hope that by increasing its dedicated transfer pricing resources and by improving their specialists capabilities, the Central Board of Direct Taxes (CBDT) will be able to meet emerging challenges in administration of transfer pricing regulation and would augment government’s effort to mobilize more revenue for the development work.
Shri Mukherjee noted that the Indian economy has seen a remarkable turn-around. A carefully-designed stimulus packages announced by the government in the wake of economic slowdown enabled the country to weather the crisis better than many other countries. The IIP figures for the month of December 2009 suggests that we may end the year 2009-10 with a growth rate of 7.5% and next year growth at over 8%, said the minister.
Following is the text of the Finance Minister’s inaugural address:
“My Colleague Shri S.S. Palanimanickam, Shri Sunil Mitra, Secretary (Revenue), Shri S.S.N. Moorthy, Chairman CBDT, Members of CBDT, Ms. Caroline Silberztein, Head of the Transfer Pricing Unit, OECD Centre for Tax Policy & Administration, Mrs. Michelle Levac of Canada Revenue Agency, Senior Officers of the Income Tax Department and participants.
I am happy to know that Central Board of Direct Taxes and Organization of Economic Cooperation & Development (OECD) are jointly organizing this Seminar where senior officers of the Income Tax Departments from all over country and dealing with transfer pricing issues are participating to deliberate on complex issues of Transfer Pricing, which is one of the most critical tax issue for both tax administrators and taxpayers.
This kind of seminar provides an opportunity for the officers to have a uniform approach on the issues across the country, which are in line with the International standards and best global practices. Further the discussion on contentious issues in a forum like this give a finality to the view of Department, which is very useful in defending cases before various appellate forums and also in developing a view from national perspective for international forum.
The globalization of Indian economy with the rest of the world has created an opportunity as well as challenges. The opportunity is in terms of a global market for movements of capital, goods, services and human resources but at the same time it has offered challenges in terms of sophisticated tax planning tools for avoiding the tax liabilities. The cross border transactions within the group are not exposed to the same market forces as transactions between independent enterprises and so potentially give rise to transfer pricing issues. The advent of e-commerce, the global structure of enterprises and the dramatic expansion of trade and investment by multinational enterprises in recent years confirms absolute importance of transfer pricing in terms of tax revenue at stake.
As you know, the Indian economy has seen a remarkable turn-around. During the year 2008-09, there has been a dip in the growth rate of GDP from an average of over 9% in the previous three fiscal years to 6.7%. In the face of these difficulties and in the midst of the economy’s slowdown, the Government put together a carefully-designed stimulus packages. This enabled us to weather the crisis better than many other countries. The IIP figures for the month of December 2009 suggests that we may end the year 2009-10 with a growth rate of 7.5% and next year growth at over 8%.
The Government of India has provided a fiscal stimulus at 3.5% of GDP at current market price for the year 2008-09 amounts to Rs.1,86,000 crore. The tax concessions to industry are more than Rs. 42,000 cr. The transfer pricing regulations have to play special role in ensuring that profits are not shifted from India through cross border transactions. The tendency to shift profit from India would be more prominent as India is among few countries exhibiting a higher growth leading to more opportunity for profitability to corporate sector than other countries. This tendency for portability of profit will get further accelerated due to enhanced transfer pricing scrutiny by the other jurisdictions. The other jurisdictions are looking to generate more revenue from overseas investments particularly jurisdictions like India, which offers highly attractive returns on investments.
Being aware of the transfer pricing practices, India introduced the transfer pricing legislation in the year 2001. The transfer pricing regulations have come of age in India – both in terms of quality of audits as well as the revenue generated for the Government. Till date, the Directorate of Transfer Pricing has made an adjustment of Rs. 23,000 crore (approx. US $ 5000 million), which is a great achievement in a small period of time. For this, I appreciate the Income Tax Department.
Integration of the world economies has forced companies to develop new business models which are efficient, have wider geographical reach, and last but not the least, tax efficient in structure. The business models of the modern multinational enterprises have developed in such a way over the years that two-third of the international trade is within the multinational enterprises. This shows the enormous capacity and flexibility of the big multinational enterprises to design the pricing policy within the group in such a way that they can make their cross border transactions tax efficient. The structure and the location of the group entities of the multinational enterprises exploit the favourable tax regime offered by the low tax jurisdictions and tax havens. This has lead to accumulation of wealth and shifting of intellectual capital to these jurisdictions. The role of tax havens and low tax jurisdictions has become an area of great concern for a country like India which is putting its all acts together to mobilize resources to attack on poverty and illiteracy.
The financial crisis faced by us has been unprecedented in recent history. It is widely believed that the tax havens and low tax jurisdictions were an important actors in the crisis. The opaque system of Exchange of Information in these tax havens and their non-compliant behavior has been a matter of concern not only for revenue base but also linked to financing of activities which are detrimental to national security interest.
Post G-20 London Summit, there seems to be consensus that the tax heavens need to adhere to the established norms of transparency standards set by the global Forum, which is also continuously monitoring the compliance by non-cooperative tax jurisdictions. The global pressure seems to be working and many tax heavens and low tax jurisdictions have already signed and many have proposed to sign Exchange of Information agreements for transparency in cross border transactions. These agreements were resisted in the past on the pretext of secrecy. The persuasive guidelines of the UN/OECD for exchange of information and also listing of Un-cooperative tax heaven never brought, these tax jurisdictions to follow International practices of transparency. The emerging global financial architecture where G-20 is a driving force is leading to compliance of international standards of transparency. It is in our mutual interest to maintain a healthy global fiscal system which is self-sustainable and all important actors including the tax havens comply with the established norms of transparency and fiscal discipline.
The UN expert group have been studying and developing ways in which to establish fairer transfer pricing practices to protect developing countries from losing profits from its tax base. Whereas a special set of Transfer Pricing Rules have been created among developing countries with the assistance of the Organization for Economic Cooperation and Development (OECD). These rules prevent companies from using transfer pricing to avoid taxes. The framing of Rules for transfer pricing purposes, which allocates profit to tax jurisdictions is an important area, which needs to be decided by countries in consultation. This is one area, which needs cooperation and consultation amongst south-south countries and also amongst north-south countries to have a broad guideline, which can prevent the tax disputes amongst the countries.
Effective and efficient administration of Transfer Pricing provisions has a policy and an administrative dimension. The tax policy reform can be achieved in much shorter time frame and it is also generally easier to manage with less resource than reform of revenue administration. This is the reason why we tend to focus more on the design of a modern tax policy system. However, in the long run for guaranteeing the fair and efficient application of provisions of international taxation and Transfer Pricing the administrative set up needs to be properly oriented to administer regulations. For this specialized skilled manpower is mandatory. In general, transfer pricing resources have increased or are increasing in most of taxing jurisdictions. India, relatively a newcomer to transfer pricing enforcement, is tending to “gear up” its capabilities quickly by increasing the number of experts to 39 from 12 in 2006 for administration of transfer pricing. The increase in transfer pricing resources has opened new challenges of development and training of skilled manpower.
I am very happy to learn that CBDT is making all efforts to improve technical skill of the manpower posted in Directorates of Transfer Pricing. I am sure that CBDT by increasing its dedicated transfer pricing resources and by improving their specialists capabilities will be able to meet emerging challenges in administration of transfer pricing regulation and would augment government’s effort to mobilize more revenue for the development work.
I take this opportunity to wish the participants and organizers a happy learning experience through exchange of ideas and views.”
Source: Press Release issued by Ministry of Finance