|Ashok Maheshwary & Associates|
|BMR Advisors, Taxand India|
|Dhruva Advisors – WTS Global|
|Economic Laws Practice|
|G.M. Kapadia & Co|
|Khaitan & Co|
|Lakshmikumaran & Sridharan|
|Majmudar & Partners|
|Nangia & Co|
|TP Ostwal & Associates|
|Vispi T. Patel & Associates|
Market participants can often be heard saying that the Indian Revenue Service is among the toughest tax administrations in the world.
"Ever since transfer pricing was introduced in India in 2001, it has become the single largest source of tax disputes and litigation for MNEs operating in India," Rahul Mitra of KPMG told International Tax Review.
One could be forgiven for thinking that this statement implies that this is the status quo of TP matters in India. In fact, Mitra stated that there had been a significant change over the past three years under Narendra Modi's administration as the Inland Revenue Service (IRS) sought to tone down the rigours of TP audits. The IRS is also trying to use alternative mechanisms to litigation including APAs and MAPs.
The economic reforms of the Indian government, such as the introduction of the goods and services tax (GST) encompass a commitment to the BEPS Project. On April 1 2016, the Indian government introduced the concepts of master file and country-by-country reporting, both in line with BEPS Action 13.
The 2017 Indian budget put forward key proposals for TP rules in the country including secondary TP adjustment and restrictions on the deduction of interest.
A secondary adjustment follows a primary adjustment. A primary adjustment can be defined as the difference between the transfer price established through the arm's-length principle and the transfer price at which the transaction took place. The difference is the excess money which the associated enterprise (AE) needs to send back to India. If this does not happen, then the money will be viewed as an advance given by the taxpayer to the AE and the interest would be assessed in the form of a secondary adjustment.
Secondary adjustments will follow primary adjustments in the following circumstances: suo moto adjustments offered by the taxpayer, adjustments agreed by the tax officer and the taxpayer, adjustments determined by an APA, and adjustments made in relation to safe harbour rules.
The restrictions on interest deductions stem from the Indian government trying to meet the obligations of BEPS Action 4. This will apply to Indian companies or the permanent establishments of foreign companies in India. It will not apply to taxpayers engaged in the banking or insurance sectors. The provisions will apply to any interest paid or any interest that will be paid by foreign AEs or third-party lenders. Regarding third-party lenders, the underlying debt must be backed by a guarantee or the equivalent deposit from foreign AEs. Interest paid or that is payable up to $150,000 will not be affected by the provision.
For tax reasons, it has been proposed that any interest in excess of 30% of earnings before interest, depreciation, tax, and amortisation (EBIDTA) will be disallowed. The excess will be able to be carried forward up to a period of eight consecutive years. The provisions will not apply to banks and insurance companies.
(As of August 2017)
|Domestic company income tax rate||30% (a)|
|Capital gains tax rate||20% (a)|
|Branch tax rate||40% (a)|
|Paid to domestic companies||10% (b)(c)|
|Paid to foreign companies||20% (a)(b)(c)(d)(e)|
|Royalties from patents, know-how etc||10% (a)(b)(e)(f)|
|Technical services fees||10% (a)(b)(e)(f)|
|Branch remittance tax||n.a.|
Net operating losses (years)
Source: EY 2017 Worldwide Corporate Tax Guide