CA Rahul Bhatia

Business restructuring refers to the cross-border re-organisation of the commercial or financial relations between associated enterprises, including the termination or substantial renegotiation of existing arrangements.

Relationships with third parties (e.g. suppliers, sub-contractors, customers, etc.) may cause/ affect restructuring. Business restructurings may often involve centralisation of intangibles, risks, or functions with the profit potential attached to them. Typical examples of restructuring include:

  • Conversion of full-fledged distributors (“FFDs”) into limited-risk distributors (“LRDs”), marketers, sales agents, or commissionnaires for a foreign affiliate principal;
  • Conversion of full-fledged manufacturers into contract manufacturers or toll manufacturers for a foreign affiliate principal;
  • Transfers of IP to a central entity within the group;
  • The concentration of functions (such as procurement, sales support, supply chain logistics, etc.) into a regional or central entity, with a corresponding reduction in functions carried out by local affiliate;
  • Cross-border transfers of intangibles, termination or substantial renegotiation of existing arrangements of say, manufacturing, distribution, licences, provision of service, etc.
  • Allocation of intangibles or risks to operational entities;
  •  Rationalisation, specialisation or de-specialisation of operations and downsizing or closing of operations.

Business restructuring have been an essential part of the activities of the multi-nationals (“MNC”s) to execute efficient ways of doing business so as to:

  • Maximize synergies, economies of scale and get supply chain efficiencies;
  • Streamline the management of business lines;
  • Improve the efficiency of the supply chain;
  • Take advantage of web-based technologies that facilitate and integrate operations; and
  • Preserve profitability or limit losses during over-capacity or economic downturn.

However, some tax experts and tax authorites have expressed concerns that in addition to restructuring businesses to get supply chain efficiencies, some tax payers may have restructured the businesses in a way that reduces the overall tax costs of the MNC without providing adequate compensation to different participating entities thereby leading to a loss of tax base of the countries involved.

A Chapter IX on business restructuring was introduced in Organization for Economic Cooperation and Development (“OECD”) Transfer Pricing (“TP”) Guidelines in the year 2010, titled “Transfer Pricing Aspects of Business Restructurings”, to lay down the broad guidelines to identify and deal with business restructurings performed by some MNCs primarily to avoid tax.

In 2016, Working Party 6 of the Committee on Fiscal affairs, set up by the OECD, agreed to certain changes to Chapter IX to conform to the recent changes prompted by 2015 BEPS initiatives pertaining to :

  • “Aligning Transfer Pricing Outcomes with Value Creation” (Actions 8-10); and
  • “Transfer Pricing Documentation and Country-by-Country Reporting” (Action 13).

This conformed version of Chapter IX would replace the 2010 version in a consolidated version of the Guidelines.

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February 2024