Question 1

International Transfer Pricing

Accepted Answer

Transfer pricing policies of every multinational business play in important role in the taxation of distributable profits across geographies. When a business operates in several countries, it is legally bound to be just and fair for by offering the right share of global profits to tax. After all, every country has a legal right to tax a share of the global profits. This principle has been reiterated across several international treaties and conventions. The recent Base Erosion and Profit Shifting (‘BEPS’) Action Plans issued by the Organisation for Economic Co-operation and Development (‘OECD’) have resulted in global acceptance. Our service offerings

Transfer Pricing Advisory and transaction structuring
Transfer Pricing Risk assessment
Benchmarking studies
Transfer pricing studies
Transfer pricing compliances
Transfer pricing planning (Safe Harbour and Advanced Pricing Agreements)
Transfer pricing litigation and representation
Transfer pricing controversy resolution and appeals

Question 2

Transfer Pricing Advisory and transaction structuring

Accepted Answer

We are adept at developing solutions and advising clientele in resolving complex transfer pricing transactions and valuations.  Our team is equipped to undertake a detailed analysis of the transaction and its impact surrounding associated laws and regulations.  Our advisory and recommendations are backed by intense research, value addition, quality and alignment to business goals. Our specialities in transfer pricing advisory include industry analysis, competitor analysis, revenue recognition criteria, billing and payment methodology, costing and internal comparable methodology approach, alignment to global transfer pricing principles, margin analysis etc.

Transaction structuring involves conducting an in-depth analysis and nitty-gritties of several aspects. We assist clientele in evaluating and structuring transactions in alignment with the transfer pricing methodologies.  Transaction structuring involves analysis from the perspective of the global tax rates, nature of transaction, treatment and taxability of the transaction under domestic and foreign tax laws, drafting and maintenance of appropriate documentation, post transaction structuring compliances etc.

At VJM, Transfer pricing advisory and transaction structuring is amongst our niche business offerings to clientele and we have been able to engage with several domestic and international clientele and derive value out of the business needs.

Question 3

Transfer Pricing Risk assessment

Accepted Answer

Transfer pricing risk assessment involves assessment of the existing transactions and business structures and providing a summary of the potential risks associated with the existing model, short comings in the existing model and implementation measures to overcome the deficiencies thus identified.  This process involves critically analysing and providing recommendations from an independent market risk standpoint.

With the presence of skilled and experienced professionals at VJM, we have associated with several clientele in undertaking risk assessment and identify possible areas of non-compliances and risks involved.

Question 4

Benchmarking studies

Accepted Answer

Benchmarking studies are undertaken prior to the commencement of the transaction in order to understand and evaluate the arm’s length margins for the purpose of transfer pricing compliances and conducting transactions.  Benchmarking studies provide guidance and practical insights into the potential pros and cons surrounding a particular transaction.

Benchmarking studies prepared and supported by sound technical positions and available jurisprudence helps clientele to assess potential risks involved and mitigate the possibility of any tax controversies and contingencies.

Question 5

Transfer pricing studies

Accepted Answer

Transfer pricing studies involve the study of the business and transactions, FAR analysis (Functions performed, Assets employed and Risks assumed) of the business as well as the competitors and benchmarking the same with the industry data based on selection of the most appropriate methodology, having regard to the facts and circumstances of the transaction.

The process involves an intense research on the data pertaining to comparable companies involved in similar business, transactions of such companies and similarities in the FAR profile to that of the business.  The outcome of the analysis would result in the shortlisting and selection of suitable comparable companies.

We provide assistance in various aspects of preparation and maintenance of transfer pricing documentation.

Question 6

Transfer pricing compliances

Accepted Answer

Transfer pricing compliances consist of information gathering, analysis and periodical reporting of various facts and circumstances to the tax authorities in accordance with the provisions of the Indian tax laws. In addition, certain compliances may also be necessitated pursuant to requirements arising out of foreign transfer pricing laws.

At VJM & Assocaites LLP, we have devised compliance programs that facilitate smooth flow of end to end process involved in transfer pricing compliances.

Question 7

Transfer pricing planning

Accepted Answer

The global transfer pricing atmosphere has moved from a controversy borne legislation to a planned and certainty-oriented arena.  With the advent of BEPS and several other initiatives taken by the OECD, there has been increased awareness, acceptance and commitment demonstrated by governments in making an attempt to resolve potential transfer pricing controversies.  The introduction of Safe Harbour (‘SH’) and Advanced Pricing Agreements (‘APA’) have brought in path-breaking changes in the transfer pricing arena.

The APA and SH involve intense processes pertaining to application preparation, documentation, discussions with the tax authorities and post agreement compliances.  The eligibility is determined basis the nature of transaction and the industry to which the business pertains to.

We work closely in association with leading expert tax and legal professionals from our network firms who are specialised in the field and closely co-ordinate the entire process. This association is aimed at bringing subject specific expertise for the benefit of the clientele and in line with our commitment to deliver exceptional client service.

Question 8

Transfer pricing litigation and representation

Accepted Answer

Transfer pricing has been an evolving aspect of the Indian tax laws and several developments over the period have come to surface.  As the transfer pricing laws in Indi mature and more nuances are noticed, there is an increase in the transfer pricing litigation.

We have a specialised team of legal and tax experts being certified professionals from the industry and help in representation of clientele before the tax authorities.  The team is extensively involved in assisting clientele data collation, data analysis and discussions with the tax authorities. With our unique combination of hand picked talent, we have been able to successfully defend several clientele before the lower level tax authorities without any further tax demands.

Question 9

Transfer pricing controversy resolution and appeals

Accepted Answer

TP controversy resolution involves complex matters and matters pending for adjudication at the appellate stages. Resolution of any outstanding transfer pricing controversy is essential in order to mitigate the continued effect of a controversial issue underlying an ongoing tax litigation. The quantum of amount locked in litigation would be humungous and may lead to continuation of litigation.

We have a specialised team of legal and tax experts being certified professionals from the industry and help in representation of clientele before the appellate authorities. With our unique combination of hand picked talent, we have been able to successfully defend several outstanding transfer pricing controversies at the appellate levels.

Question 10

What is transfer pricing?

Accepted Answer

Transfer pricing is the act of determining the arm’s length value of an international transaction undertaken with a related party.

Question 11

What is arm’s length price?

Accepted Answer

Arm’s length price is the price at which two unrelated parties undertake similar transaction under similar terms and in similar circumstances.

Question 12

What is an international transaction?

Accepted Answer

An International Transaction is defined as a transaction undertaken between two or more Associated enterprises, where atleast of the party is a Non-resident.

A transaction that has been carried out by two non-residents involving Indian assets or income accruing form India is also covered under the ambit of international transaction.

Question 13

What are the related party transactions covered subjected to transfer pricing?

Accepted Answer

Some of the common transactions subjected to transfer pricing are:

Purchase and sale of goods (finished goods, raw materials or inventory)
Rendering of services
Receipt of services
Sale or purchase of assets
Sale or purchase of Intangibles
Exclusive licensing of intangibles
Reimbursement of expenses paid/ received
Corporate guarantees given/ received
Loans disbursed/ received
Interest paid/ received
Sale of undertaking/ business
Amalgamation of business/ undertaking/ division

Question 14

What are the different methods prescribed for computation of arm’s length price?

Accepted Answer

Under the Indian tax laws, the following methods have been prescribed for computation of arm’s length price.

Comparable uncontrolled price method (‘CUP’)
Cost plus method (‘CPM’)
Profit split method (’PSM’)
Resale price method (‘RSM’)
Transactional net margin method (‘TNMM’)
Other methods prescribed by the Central Board of Direct Taxes (‘CBDT’) from time to time (currently, no other method has been prescribed)

As per the transfer pricing principles, arm’s length price should be computed using the most appropriate method (‘MAM’). Selection of the MAM depends on the facts and circumstances of each case. Every taxpayer is required to justify why the method selected for computation of arm’s length price is the MAM.

Question 15

What is the documentation to be maintained by a company in case of an international transaction?

Accepted Answer

The Indian tax law requires maintenance of a three-tiered documentation for transfer pricing compliance. In line with the OECD recommendations under Base Erosion and Profit Shifting (BEPS) Action Plan, there is a three-tiered approach to maintenance of documentation as under:

Master file: The Master File contains global information about the multinational corporation group, including information on intangibles and financial activities, to be made available to the local regulations.

Local file: The local file must contain all relevant information for material intercompany transactions of the group entity, in each separate Country

Country by country report: Country-by-country report (CbCR) must contain details on income, earnings, taxes paid and measures of economic activities.

Maintenance of a local file by Indian taxpayer is mandatory. However, Master file and CbCR could also be maintained by the Associated enterprise outside India.

Question 16

What is the documentation to be maintained in the local file in case of an international transaction?

Accepted Answer

As per Rule 10D of the Income Tax Rules, 1962, read with other provisions of the Indian tax laws, the following documents should be maintained the person undertaking an international transaction:

Details of the taxpayer and ownership: The details of the ownership of the person with respect to the company including ownership structure, the details of the shares, and information on ownerships held by any other company on it.
Details of the group: A detailed profile of the foreign group to which the taxpayer pertains to and is associated with for the international transactions. The details such as name, address, ownership structure, country where tax returns are filed, legal status, etc.
Details of business activities: A detailed description of the business activities of the taxpayer as well as the group entities involved in the international transaction.
Details of International transaction: Details relating to the international transaction, such as nature of the transaction, details of the property or services transferred, the terms of agreement for undertaking the transaction, rate per unit, aggregate amount, value of each transaction etc.
FAR analysis (Functions performed, assets employed and risks assumed): The FAR analysis pertaining to the taxpayer as well the group/ associated enterprise with whom the transaction was undertaken
Industry overview: The details of the records collected for the entire business or a particular division of the business during the period of the company’s business activity in which the foreign transaction has been involved. These include reports such as the estimates made on various market trends, forecasts about the market, budget analysis or any other such finance-related reports prepared by the company.
Internal data pertaining to similar transactions: The details of the uncontrolled transactions, if any, that has taken place with a third party during the period of the international transaction. The nature and the terms and conditions of such transaction have to be mentioned as they play an important role in deciding the value of the international transaction.
Impact analysis: The details of the analysis conducted in order to assess the impact of the uncontrolled transaction on the international transaction concerned.
Selection of Most Appropriate Method: The details of the various procedures considered and the one adopted in deciding the arm’s length price with respect to an international transaction. The details should also include the details on why the particular method was adopted and how it was implemented successfully in order to decide the arm’s length price.

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