Latest updates on transfer pricing

Transfer pricing concept has gained immense importance over the past few years. Rules and methods used for pricing of transactions among endeavors under common control are generally the basis forming transfer pricing. Transfer pricing has gained importance in diverse business enterprises because of requirement of reporting of financial information by segment and related party transactions as focused in the International Accounting Standard (IAS 14 & IAS 24) and Accounting Standard (AS 17 & AS 18).

Concept of transfer pricing
Transfer pricing on the whole cite to prices of transactions between associated enterprises which may be carried out under conditions different from those taking place between independent enterprises. Transfer pricing refers to the value attached to transfer of goods, services and technology between related enterprises or entities. Transfer pricing provisions are relevant for international transactions as well as domestic transactions between associated enterprises.
Transfer pricing can be used as a profit allocation method to ascribe a multinational corporation’s net profit (loss) before tax to countries where it does business. It is a major tool for corporate tax avoidance also cited as Base Erosion and Profit Sharing (BEPS).

International transactions concept
As per section 92B (1) of Income Tax Act 1961 (“Act”), international transactions are referred as the transactions between two or more associated enterprises, either or both of whom being non-residents.

Specified domestic transactions concept
Certain domestic transactions with related parties within Indian borders are termed as specified domestic transactions as coming under the purview of Finance Act, 2012. It promulgates that revenue arising from specified domestic transactions as well as any allowance for an expenditure, allocation or interest of any cost or expense arising from a specified domestic transaction shall be conditioned with reference to the arm’s-length price.

Indian scenario on transfer pricing:
Transfer pricing has its participation in Income Tax Act 1961 with its introduction to the Finance Bill on 2001, the Finance Minister explained the importance of transfer pricing as under –
“The increasing participation of multinational groups in economic activities has given rise to new and complex issues rising from transactions entered into between two or more enterprises belonging to same multinational group. The profits derived by such enterprises carrying on business in India can be controlled by multinational groups by manipulating the prices charged and paid in such intra group transactions, thereby leading to erosion of tax revenue. With a view to provide statutory framework which can lead to computation of reasonable, fair and equitable profits as well as taxes in India in the case of such multinational enterprises, new provisions are proposed to be introduced in the Income Tax Act”
The government has notified transfer pricing guidelines under section 92 of the Income Tax Act 1961; vide notification dated 21st August, 2001 which deals with various aspects of transfer pricing.

Transfer pricing amendments
Transfer pricing as defined earlier, was introduced in year 2001 in Income Tax Act. Today, from 2001 – 2018 amendments played a major role related to changes in the concept of transfer pricing. Latest updates or amendments that made transfer pricing alter current field of vision were made by government of India while announcing the union budget of year 2017 and 2018. From the perspective of transfer pricing, the budget proposed as well as brought certain amendments with respect to:

• Implementation of Country-by-Country Report (CbCR): The amendments as per the Finance Bill 2018, proposed to extend the time limit for furnishing CbCR to 12 months from the end of the reporting accounting year. The due date now would vary for each case depending upon reporting accounting year to which CbCR provisions are applicable.
• Safe harbors rule (SHR): The recently amended safe harbor’s rules have been an attempt towards resolving transfer pricing disputes, bringing certainty and facilitating business operations. However, the same has not met with a positive response from the industrial participants yet.
• Transfer pricing documentation and certification: A compliance requirement with respect to domestic expenditure covered under section 40A (2) of the income tax Act was removed with effect from year namely, FY 2016-17.
• Advance Pricing Agreements (APAs): Tax authority and a taxpayer execute an ahead-of-time agreement on an appropriate transfer pricing methodology for a set of transactions at issue over a fixed period of time.
• Secondary adjustments: Provisions related to secondary adjustment were introduced in transfer pricing law by the union budget of 2017. While, secondary adjustment is a globally accepted principle, it does pose certain challenges in the Indian context.

Information pertaining to this blog includes general guidelines, latest amendments in transfer pricing and its impact on economy. However, the details are complicated and require an expert in this field to assist you in complying with all the provisions. We have a team, proficient in this domain which can assist you in transfer pricing certification, complying with rules and requirements of tax authorities’, tax structuring, international taxation and withholding tax treaty issues, providing reports on industry analysis and its review, preparation of transfer pricing documentation or transfer pricing study, representation for tax audit as well as tax litigation.

For detailed discussion on transfer pricing aspects, you may visit Transfer pricing law in India, Domestic transfer pricing, Transfer pricing made easy with APAs, Transfer pricing: Introduction to Country-by-Country report (CbCR).

Taxation of expat employees

Any person or persons residing temporarily or permanently in a country that is different from their home country or country of citizenship is referred to as an expat. Taxation of such expat employees involves a slightly different computation than the tax computed for a regular employee of an Indian organization.

Foreign expat in India
For any foreign expatriate working in India, the salary is deemed as earned in India if they are paid for services rendered in India. This is based on Section 9(1) (ii) of the Indian Income Tax Act. This rule is applicable irrespective of the resident status of the expat employee. Furthermore, the income earned is subject to tax deducted at source (TDS) irrespective of where the salary is actually credited. This means that even if the salary is credited in the home country of the expat employee, it is still subject to the Indian TDS.

In such cases, if salary is paid in foreign currency in the country of expat’s citizenship then such salary is converted into Indian Rupee (INR) and tax is calculated on total Indian currency value. Rate used to compute tax applicable is telegraphic transfer buying rate used by State Bank of India (SBI). Rate used is the rate on which tax is actually calculated on that respective day. This is based on Deduction of tax (Rule 26) section 192(6) of Indian Income Tax Act.

In case of foreign expats in India, actual tax burden is on Indian company where the expat has taken up a project or assignment and not on the expatriate himself or herself. For instance, when a US expat is sent to India, the Indian company will bear the burden of income tax. This in turn gives rise to the concept of grossing-up.

Tax grossing – up
When the foreign expat receives the salary, only the net salary after tax gets credited to his account. The Indian company where he has taken up the project will pay the tax applicable for his income earned. For instance, if net salary paid to the expat employee is INR 100 and tax paid by the company is INR 30 then total salary paid to the expat is INR 130. Total tax paid by the company will be computed on INR 130 and not on INR 100. This implies that an expat’s salary is calculated as the sum of net salary and tax liability on it. This is called grossing – up.

Tax computation for an expat’s salary
In India income tax rate is 30%. Over this 30% rate, 3% education cess is levied cumulating total income tax rate to 30.9%. Based on above example of INR 100 net income and INR 130 gross income the grossed – up tax calculations will be as follows: 30.9×100 / (100-30.9). Hence, total grossing up becomes 44.71%.

Double tax avoidance
In cases of such expatriates, there is always a chance of double taxation in each country where the employee is a resident and his / her worldwide income is taxable. In order to prevent such situation Central government of India under Section 90 of the Income Tax Act of 1961 has formed double taxation avoidance agreements (DTAA) with over 90 countries.

In cases where the income is earned in any country which is not on the list of DTAA and if tax has been paid in said country, then as per Section 91 he / she will be entitled to a deduction from income tax in India payable by the expatriate employee for a sum computed on the taxed income at the Indian rate of Income tax or tax in the country where the income is earned, whichever is lower.

Our expatriate professionals are proficient in providing services related to repatriation assistance for employees, tax compliance services, tax return preparation, annual tax equalisation calculations, payroll processing services as well as assessment, appeal, representation, opinion and litigation matters.

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