The Indian tax department’s “survey” of the locations of the BBC in Mumbai and the country’s capital Delhi made headlines this week. Before coming to a close on Thursday, the marathon survey had taken more than 58 hours in total.
The opposition claimed the government was criticising the BBC because it broadcast a divisive documentary on Prime Minister Narendra Modi just after the survey began, so this quickly took a political turn.
A BJP spokesperson also launched a vicious attack on the foreign media outlet during a press briefing.
The tax authority further underlined that it is a survey rather than a raid or search. Such surveys are frequently done in accordance with the rules of the Income Tax Act.
The records of a “international media company” contained proof of unpaid taxes and unreported income, according to a statement from India’s tax office CBDT on Friday. The examination turned up “many errors and inconsistencies with reference to Transfer Pricing documents,” the CBDT statement added.
But, the central problem, the so-called Transfer Pricing Regulations, became the topic of conversation, with many people still having questions about it.
On that topic, KPMG aids in our understanding of everything there is to know about transfer pricing.
Multinational Companies (MNEs) operate their enterprises in a number of different countries and can set up their affairs so that they can shift profits and reduce taxes. Since tax revenues are crucial for the growth of nations’ economy, TP laws have been implemented globally to deter tax cheating.
Indian Transfer Pricing Rules (TP Regs) cover international transactions involving businesses that are part of the same MNE group (i.e., controlled transaction). Certain domestic transactions involving businesses that qualify for tax breaks, reduced tax rates, or other incentives are also covered. Under the TP Regulations, all transactions are covered, including transfers of goods or services, loans, guarantees, payments for intangibles, sharing of expenses or profits, etc.
The purpose of TP regulations is to give a way to assess if the transfer price is fair. In an open market or market pricing, two unrelated parties would be charged an arm’s length price (ALP).
According to the TP regs, the taxpayer may select any one of the following six techniques to determine the ALP:
- Compares the “price” of goods or services in a regulated transaction with those in an uncontrolled transaction between unrelated parties.
- Resale Price Method (RPM): Useful when goods or services are acquired from connected parties and resold to unconnected businesses without substantially adding value.
- Cost Plus Method (CPM): Used in situations where physical things are produced, manufactured, assembled, or sold to or given to connected parties.
- Profit Split Method (PSM): Under PSM, the transacting parties receive returns for routine functions from the combined group’s overall profitability, and the remaining profitability—often referred to as non-routine profits—is divided up among the parties based on each party’s contribution to the creation of such non-routine profit. It is employed in situations where there are complex transactions that cannot be independently assessed or when there is the usage or transfer of distinctive intangibles.
- The Transactional Net Margin Method (TNMM) compares the net profit gained from controlled transactions with those from uncontrolled transactions using an appropriate base (e.g., sales, costs, assets, etc.).
- Other Method: “Other Method” allows taxpayers to calculate the ALP using a totally different strategy or a mix of one or more of the aforementioned ways in situations where none of the aforementioned methods can be used. This technique takes into account the price that has been charged, paid, or would have been paid for a similar or identical uncontrolled transaction.
The pricing and/or margins of unrelated parties that will be employed in putting the aforementioned techniques into practise should be publicly accessible or can be found in public databases.
According to the TP Regulations, taxpayers are responsible for compiling and filing a list of supporting documents to show that their controlled controlled transaction was conducted at arm’s length.
The onus would shift to the tax authorities to prove otherwise by producing necessary documents or evidence countering the taxpayers’ documents once the taxpayer has fulfilled its obligation by filing the required documents. If the tax authorities believe that the taxpayer’s transfer price is not at arm’s length and wish to disturb the same.
