Transfer pricing guidelines– Global/Indian scene: Latest income tax obligations of entities
When I went to one of the nationalized bank’s corporate office for discussions on transfer pricing scene at global/Indian situations, I was informed that India has already committed to implement the recommendations of 2015 Final report on Action 13, titled “Transfer Pricing Documentation and Country-by-Country Reporting” identified under the OECD Base Erosion and profit Shifting (BEPS) Project, section 286 of the Income-Tax Act, 1961(“the act”) which was inserted under Finance Act, 2016.
The following article has been written to explain the salient features of the reporting requirements enforced on corporations in India/abroad which are said to assist tax authorities around the world to use transfer pricing audit to get the tax due to their countries from corporations who seemed to have found various ways to avoid the tax owed by them.
Transfer pricing: basic background and the history of civilized nations’ efforts to recover the taxes owed to them by big corporations
Transfer pricing can be delineated as the price paid for goods transferred from one economic unit to another, assuming that the two units involved are situated in different countries, but belong to the same multinational firm. This is popularly known as transactions among related parties. Unlike arm’s length transactions which takes place between a buyer and seller who are working in market place transactions to make profits on business terms purely acceptable to both of them, transfer pricing among related parties artificially try to push the income in a country which has low tax rates and account for expenses in a country with high tax rate like India.
The following example may explain the issues.
Let us analyze the following case for a fortune U S based company:
|Country||Profit Before tax ($b)||Profit before Tax contribution (%)||Employees||Customers||Effective Tax rate|
With 4% of employees and 1% customers– Ireland contributes to 64% of Group’s profit, on which tax is paid at a solitary rate of 0.06%, so much for the intelligence of the tax consultants and that too under the able eyes of US and other nations which resulted in the action of all countries to stop this plunder.
1. In September 2014, the countries participating in the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project published the report “Guidance on Transfer Pricing Documentation and Country-by- Country Reporting” (the September Report). The September Report was presented to the G20 Finance Ministers at their September 2014 meeting in Cairns and to G20 Leaders at their November 2014 meeting in Brisbane, Australia.
2. The September Report described a three-tiered standardized approach to transfer pricing documentation. The following information has been taken out of above report. Reference also given at end.
This standard consists of
3. The report wanted timely action by the member countries who attended the conference.
4. This note sets out guidance on the following matters relating to the implementation of the CbC Report:
(i) the timing of preparation and filing of the CbC Report,
(ii) which MNE groups should be required to file the CbC Report,
(iii) the necessary conditions underpinning the obtaining and the use of the CbC Report by jurisdictions and
(iv) the framework for government-to-government mechanisms to exchange CbC Reports together with the work plan for developing an implementation package.
For a layman, it means that lot of information about various multi national enterprises (MNE) will be exchanged periodically among those countries who evolve suitable guidelines/rules for collection, study and exchange of the information.
For what reason, this much labor is required, is the common refrain among us.
Let us flow with our narratives. India one of the prominent signatories to the conference, through Ministry of Finance, Government of India vide its communication F.No. 370142/25/2017-TPL dated 6th October 2017 invited public comments on would be submission of following statements by the concerned organizations:
(i) Rules 10 DA and 10DB would be inserted and forms 3 CEBA to 3 CEBE would also be introduced.
(ii) Information about 10 DA is as under:
Information about form 10DB– furnishing report in respect of an international group:
Discussion about form 3CEBA and form 3 CEBB is given as under:
Form 3 CEBA: (Master file)
Form No. 3CEBB
It is a notification report by a constituent entity, resident in India, of a non-resident international group (I may refer Hindustan Unilever as an entity with details of Unilever group, as principal, as an example).
Form No. 3CEBC
Details like name of reporting entity, PAN, address, whether the reporting entity is the parent entity of the group, with details in
List of all the constituent entities of the multinational enterprises group included in each aggregation per tax jurisdiction with details of jurisdiction, names of entities, main business activity details like R&D, holding of intellectual property etc.
All the returns have to submitted by either 31st March 2018 or 1ST March 2018.
Penalty for non- submission of Cb CR has been prescribed as INR 5000 per day, failure to furnish additional information or documents sought by revenue authorities invites steep fine of INR 5000 per day from the day on which the period for furnishing the information and document expires. A huge penalty of INR 500,000 for inaccurate information filed under Cb CR has been mentioned.
Transfer pricing has been playing its part since 1950 on wards in developed countries to avoid taxes, evolve strategies to shift income tax from high tax regimes to less tax ones and finally playing more sophisticated procedures to earn more money. It is reported that in the year 2011 Starbucks paid no corporation tax in UK for a turnover of 398 million sterling pounds, Google paid a corporation tax of 6 million sterling pounds for a turnover of 2.6 billion sterling pounds while Amazon.com paid no income- tax for a turnover of3.3 billion sterling pounds. Highly organized and developed countries like USA, UK or OECD countries found to their dismay that they got nothing as tax while striving hard to provide the best financial or technical atmosphere for one to explode and virtually mint profits at no cost.
Therefore, BEPS Action 13-three tired Transfer Pricing Documentation got into action and mutual cooperation among OECD/G 20 countries has come into play.
The writer having got excited over this development therefore wrote this article.
I do visualize a situation where Indian professionals (both private and public sector including the government officials) from Finance, accounting or related software fields will guide the world with their knowledge and we as a nation would receive its appropriate tax-dues from its tax payers while offering the best services.
About the author : Subramanian Natarajan C.P.A. (USA), M.Sc., CAIIB took voluntary retirement in 2000 from Punjab National Bank after handling various facets of banking like deposit mobilization, foreign exchange, auditing and borrower accounts. After living in USA for 12 years during which period he worked in international auditing firms specializing in international tax, auditing, IFRS etc. He can be reached at [email protected] Tel: 7503562701, 9015613229. He currently lives in Delhi. His name appears as tax consultant in web site of American embassy, New Delhi.