Till a few years ago, the Union Finance Budget used to be the country’s signature tax event of the year. However, the recent past has seen tax-related changes roll in through the year, so much so that every month has taxpayers understanding and debating new developments, thereby consigning the Budget to a lower pedestal. The year 2017 was no different. In retrospect, many of the 2017 announcements are expected to have far-reaching implications in the new year. Transfer pricing may continue dominating the mind space of all corporate taxpayers.
The detailed rules on transfer pricing master file (MF) and country-by-country report (CbCR) compliance might require companies to devote significant resources to gathering and presenting more granular information on their global supply chains and the distribution of profits across them. The tax administration plans to use this data as a risk assessment tool and to identify audit targets. It is, therefore, important to adopt a strategic outlook to this exercise than merely collecting and dumping data without understanding the underlying story of the business and potential gaps, if any. Data collection and analysis would also necessitate robust technological process flows and the adoption of digital tools to optimize effort. Taxpayers should also keep in mind that separating transfer pricing from other taxes and finding answers in a vacuum will be counterproductive. Any solution will require careful consideration of the interplay with newer legislation such as General Anti Avoidance Rules (GAAR), Place of Effective Management (PoEM) and Goods and Services Tax (GST). Therefore, responding to tax authority requests will need a more harmonized interface between the tax, finance and business professionals within an organization.
Availability of greater information with the tax authorities may likely change the nature of transfer pricing controversy. Taxpayers can expect more questions on intra-group services, financing and intangibles arrangements and business restructurings as the government-to-government information exchange channels deepen and the MF and CbCR become accessible globally. The tax administration is also increasingly deploying technology for collection, collation and analysis of data. This would feed into a more targeted and well-designed tax policy.
Reducing tax costs and eliminating uncertainty remain key goals for all companies. The Indian tax administration must be lauded for taking sustained steps in the right direction on this path. The Indian Advance Pricing Agreement (APA) continued to deliver results in unilateral APAs. The focus on bilateral dispute resolution saw the Indian Competent Authority meet and discuss matters with the US, the UK, Japan, Australia, Singapore etc. and agree to resolve past cases and find solutions for two-sided APAs. The first bilateral APA between India and the US was signed earlier this month. The momentum will carry on, driven by the recent announcement by India that it will permit bilateral Mutual Agreement Procedure (MAP) and APAs on transfer pricing issues with tax treaty partners even in the absence of Article 9(2) of a tax treaty. This relaxation will allow companies headquartered in countries such as Germany and France to try to solve their India transfer pricing issues through bilateral channels as an alternative to the protracted Indian domestic dispute resolution process.
The revised safe harbour rules should also attract more companies, especially the smaller-sized ones, to contemplate choosing it rather than leaving themselves open to the risk of a transfer pricing adjustment in a routine audit. The expansion of the safe harbour rules to low value adding intra-group services was a welcome move. It can help many taxpayers receiving such services from their global or regional headquarters mitigate detailed scrutiny as long as they adhere to the conditions prescribed in the rules. It provides yet another avenue for smaller taxpayers to exempt themselves from annual audits and submit to a simplified process reducing litigation and fostering certainty.
Anti base erosion and profit shifting (BEPS) measures such as regulating digital taxation, narrowing permanent establishment thresholds and limiting financial hybrid instruments will gain further strength as policymakers tighten existing rules and bring in fresh ones to address loopholes.
The American Tax Cuts & Jobs Act 2017 (colloquially termed as US Tax Reform), signed into law on Christmas Day of 2017, promises to be revolutionary for multinational groups. The salient features include a drastic reduction in the headline corporate tax rate to 21%, tax on payments by companies in the US to related parties overseas, limitations on interest deductions and changes in dividend taxation. Companies will be prompted to examine the holistic impact of these changes. They will have to reassess existing investment structures and contemplate recalibrations as questions on the viability of outsourcing, cost of capital, and location and use of cash reserves surface again.
Suggested taxpayer action
In the above context, corporate taxpayers could consider measures to ADAPT quickly. More specifically, it would mean formulating the following intertwined five-pronged strategy
Assessment: Companies may need to spend time digesting these changes and understanding their individual impact and ramifications in a broader context. Re-examining investment structures, for example, for a US-headquartered IT company or pharma company, will have to take into account the US Tax Reform while balancing out the substance requirements necessitated by the BEPS project. Involving professional advisors early in the lifecycle could help identify potential pressure points and integrate remedial action into their eventual strategy. Companies will also benefit from evaluating controversy management tools such as APAs upfront to minimize controversy.
Deployment: As information becomes supreme, technology deployment will be a new focus. Automating information gathering and use of data analytics tools are two areas where companies will need to invest time and effort. With vast amounts of data required as part of the new transfer pricing reporting requirements globally, manual work would need to be supplemented by digital means
Agility: Companies have to be nimble and ready to move once they have understood the implications of these changes. Putting in place well-thought-out strategies fortified by technical knowledge and technological tools will help them build strong foundations in the new era of controversy that will come with more focused tax authority audits.
Process: Implementing robust internal processes to capture data, make sense of it and feed it into appropriate policies, operationalizing these policies and again collecting output data to support the final outcomes is essential. This will also require proper technological interventions in terms of tools and systems. Every company could have to fashion policies that support their internal organizational structure in an optimal way.
Transformation: Ultimately, companies have to transform their outlook to tax and transfer pricing from a compliance-based approach to a more strategic thrust. In a data and information led tax enforcement age, all key stakeholders have to be involved in decision making and transfer pricing has to be an ex-ante consideration rather an ex-post analysis.
Navigating these changes, therefore, involves a deeper understanding of value chains and investment structures in business, greater familiarity with data and IT systems and the ability to marry these two parts through the optimal use of technology to create credible transfer pricing documentation, defend inter-company pricing policies and limit controversy. Companies quick to ADAPT would find success in this journey
The author is Ashwin Vishwanathan, Partner, EY India