MNCs Get Flexibility in Transfer Pricing

Govt. hopes move will dispel fear among foreign cos

The government has allowed multinationals flexibility in valuing their transfer of intangibles such as brand to their Indian subsidiaries without any fear of the tax department. The government hopes it will dispel the fears that India was gunning for foreign companies after it changed income tax law retrospectively and announced tough tax avoidance rules. The new rule will allow multinationals to use any arms-length methodology to value intangibles such as brand name, goodwill, and dealer network that are transferred to their Indian subsidiary, withdrawing any discretion to the tax officer to question the value so determined. The government has already introduced advance pricing arrangement in the budget to bring down tax litigation and give certainty to taxpayers... the rule complements this, an I-T department official said. This is also expected to help check the unusually high litigation in respect of transfer pricing. Transfer pricing is a key focus area for the income tax authorities to check trade mispricing, one of the most widely used ways to evade taxes. This budget the government for the first time brought companies enjoying income tax holidays under schemes such as special economic zones under the ambit of transfer pricing. However, aggressive stance by income tax authorities lately has led to increased disputes and litigation in transfer pricing. The current rules prescribe five methods comparable uncontrolled price, resale price, cost plus, profit split and transactional net margin to calculating transfer price for subsidiary-parent transaction, none of which are considered suitable for valuing intangibles. The rules also give the Central Board of Direct Taxes flexibility to fix any other method. The Board has introduced the latest rule under this provision. Any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all relevant facts, states the rule applicable from for determination of arms-length price from FY 2011-12 onwards. Experts term the announcement of the new rule as a positive development. This is a very pragmatic move as it will allow companies to use any unspecified method for valuation particularly of intangibles, said Rahul Mitra, partner (tax & regulatory services practice) PwC. India is right on track as the Organisation for Economic Co-operation and Development is also talking about such a rule, he added. However, Sudhir Kapadia, partner & national tax leader, Ernst & Young want further clarity in the rule. It would be better to be prescriptive to prevent any subjectivity as the flexibility will also be enjoyed by tax authorities, he said. The government has also allowed advance pricing agreement that allows taxpayer to enter into an agreement with tax authorities set out the method of determining the transfer pricing for inter-company transactions beforehand.

Welcome Move

The new rule will allow multinationals to use any arms-length methodology to value intangibles transferred to their Indian arm This will withdraw any discretion to the tax officer to question the value so determined The move is also expected to help check the unusually high litigation in respect of transfer pricing The rules also give the Central Board of Direct Taxes flexibility to fix any other method 

Economic Times, New Delhi, 11-06-2012