Government Panel #2: India

Pacific Rim Tax Conference 2017Pullman San Francisco Bay

March 2017

India Panelists

• Rajat Bansal₋ Joint Secretary, FT & TR – II, Ministry of Finance, India

• Alpana Saksena₋ Chief Tax Officer, Oracle (India)

• Mukesh Butani₋ Managing Partner

Slide 1

Indian Tax Environment

• Moral crusade against black money₋ Income disclosure₋ Demonetization₋ Exchange of information

• Introduction of anti-abuse measures₋ GAAR₋ Treaty changes₋ Thin capitalization₋ BEPS

• Most BEPS action points vindicate India’s position

• However, challenges to MNEs could multiply₋ Unilateral action – equalization levy₋ No mandatory dispute resolution₋ Misalignment with key OECD standards (arbitration)

Slide 2

India Transfer Pricing Litigation - Landscape

2001 – Transfer pricing regulations introduced in India

2002 – Specialist set of officers – Transfer Pricing officer entrusted with transfer pricing audits

2012 – Domestic transactions bought within the ambit of Indian TP regulations & APA rules introduced. Sixth method in TP brought in

2013 – Circular on Contract R&D services and Safe harbor provisions introduced

2015 – Range and multiple year data adopted

2016 – Risk based audits and alignment with BEPS Actions

Slide 3

APA – Recent Developments

IT enabled services (“ITes”)Engineering design servicesSoftware development services Distribution of manufactured goodsRoyalty paymentCorporate guaranteeInterest paymentContract Pharmaceutical ManufacturingAdministrative and business support servicesBankingAutomobileSogo Shosha trading

APA transactions concluded

APAs filed – Over 700+

APAs concluded - 141130 Unilateral

+11 Bilateral APAs*

*As on March 7, 2017

Services transactions (e.g. IT/ITeS) is one of the most litigated sector in the area of Transfer Pricing and hence majority of the APA applications relate to such transactions Slide 4

APA Experiences – Outcomes & Other issues

Outcomes

Definition of pricing policy for

administrative implementation

Definition of cost base

Progressive mark up for services

Change in approach from

arithmetic mean to

percentile

Pricing policy – Cost plus v/s hourly rate

Re characterization – High value v/s

low value

APA – Other issues

Level of Interaction/ Dialogues between

government

Accounting

Indirect tax - service tax/GST

Policy to be adopted in the interim

period

Approach for open matters

Correlative relief clause

in DTAA

Slide 5

Secondary Adjustment – Glocalisation

OECD/ Globally prevalent mechanism to implement Secondary Adjustment – Elective process vs. mandatory approach

High courts have struck down secondary adjustments due to no statutory mandate (Vodafone / Shell) Primary adjustments accepted by taxpayer (self adjustment, audit/ appellate decisions, APA, MAP, Safe Harbor)

₋ Excess Money has be repatriated to India – financial statements to be aligned₋ Deemed to be advance and thereby interest to be imputed

Implications on ongoing audits₋ Risk of double taxation - Article 9 of Model Tax Convention does not deal with the issue of secondary

adjustment and it is a matter of domestic law of contracting states₋ Payment of management fees, AMP transaction, Free of cost transactions?₋ Order by Supreme Court – deemed acceptance?₋ Financial hardship of AE?

Slide 6

Secondary Adjustment – Implications

• Consider an elective approach

• Clarify prospective applicability

• Factor in congruency with the exchange control / VAT

• Clarify whether interest would accrue from the date of transaction

• Not mandate entry in the books of the Related party

India should …

• Fin 48 provisions – provision for tax need to account secondary adjustments

• Transactions where indemnity is involved

• Compelling case for MAP / bilateral APAs to avoid double taxation

• Plan transfer price prior to closing financial statements than making self adjustment in the tax return

Tax payers need to watch out for…

Slide 7

Interest Limitation – BEPS Alignment

Provisions BEPS Action Plan 4 Section 94B

Approach Recommend Interest to EBITDA ratio (10% -30%) and supplements ‘worldwide group ratio rule’

Interest to EBIDTA ratio of 30%

Threshold forapplication

Recommended, amount not specified Interest payments must exceed INR 10 Million

Carry forward ofdisallowed interest

Discussed but period not specified Allowed for 8 years

Deemed interest fromAE

Not specifically covered, however guarantee fee is considered as interest equivalent

Recognized deemed interest from AE based on guarantee/ money deposit by borrower’s AE with Lender

Exclusions Discussed need of specific rules for banking and insurance companies

Excludes banking and insurance companies

Slide 8

Tax policy agenda – 2017 and beyond

Comparability issues and functional issues getting sorted out Use of Profit Split Method – Marketing intangibles / Location savings Profit attribution principles – lack of clarity on single entity vs global formulatory approach Commissionaire agency PE issues Withholding tax on software payments India MLI landscape – treaty interplay including grandfathering

India aligning to BEPS / global standardsSlide 9