India May Scrap The Compulsory Transfer Pricing Audit Based On Monetary Threshold Limits

India May Scrap The Compulsory Transfer Pricing Audit Based On Monetary Threshold LimitsIndia has been struggling hard to deal with transfer pricing and taxation issues. Even Vodafone, Nokia and Shell received notices from income tax authorities of India regarding transfer pricing and other taxation issues. Indian government has also proposed establishment of Income Tax Overseas Units (ITOUs) of India in foreign countries. A notification for issues relating to export of computer software and corresponding direct tax benefits has also been issued by Indian government.

We at Perry4Law believe that transfer pricing laws and regulations in India need clarification. Similarly, issues like avoidance of tax by certain transactions in securities, avoidance of income-tax by transactions resulting in transfer of income to non residents, international transaction and arm’s length price, etc also required to be taken care of. All this requires a pragmatic and holistic approach on the part of Indian government.

Working in this direction, the Indian government is planning to scrap the Rs. 15 crore threshold limit for referring every international transaction between an multi national corporation’s (MNC) arms for compulsory transfer pricing audit, and about to embrace a more focused approach to zero in on cross-border transactions with potential for tax evasion.

The proposed risk-based selection of transactions between MNC arms for transfer pricing audit will spare many companies the unnecessary hassle and help reduce tax litigation. Experts say the “risk-based” approach is much more efficient than the monetary threshold-based scrutiny and audit. The proposal, which is under the tax department’s consideration, would be taken up by the next government as part of tax administration reforms, sources said.

At present, assessment officers refer every cross-border transaction above the threshold between associated enterprises to a transfer pricing officer, who checks whether it is on the arm’s length basis. If it is found to be a dictated price with little relation to cost or value-addition, the assessing officer recomputes the income and makes extra tax claim. Choosing cases based on the monetary threshold leads to overburdening of field officers. Sources said that every TPO in India has to do about 50 audits a year on an average compared to 5-6 that his UK counterpart does. This seriously affects the scope and depth of the audit. Selecting only those cases for audit that indicate a high risk of revenue loss would enable the tax department to devote more time and go deeper into minute details.

The idea of selecting transactions for audit based on their risk of revenue leakage stems from India’s discussions with the OECD, which is working on new transfer-pricing documentation rules and a format for country-by-country reporting of income, taxes and economic activity of MNCs.