Significance of TRANSFER PRICING documentation in Indian Transfer Pricing regulations
An estimate shows that 60% of the global transactions are amongst the related parties in value terms. That means every second transactions in global trade is covered under Transfer Pricing regulations. In view of digitalisation of tax administration, faceless interactions of tax payers and tax administration in India and automatic exchange of information in place between tax jurisdictions, the significance of Transfer Pricing documentation in Transfer Pricing regulations is to be well understood by taxpayers. Let us understand some key intricacies of Transfer Pricing documentation in India.
B: Indian TRANSFER PRICING on Transfer Pricing documentation
Three-tiered documentation system is presently prescribed by Indian Transfer Pricing Regulations based on the recommendation by Organization for Economic Co-operation and Development (OECD), BUSINESS EROSION AND PROFIT SHIFTING Action Plan-13 as per Section-92D and Section-286 of INCOME TAX ACT along with Rule-10D, Rule-10DA and Rule-10DB of ITRs.
Country by Country Reports:
It is intended to provide a global financial snapshot of allocation of the group’s Revenue, profit and taxes amongst various tax jurisdictions in which group is operating. Rule-10DB prescribed detailed information to be furnished in Form: 3CEAC or/and Form: 3CEAD as per the conditions and manner prescribed in this Rule.
It is intended to provide detailed qualitative information about the group with key value drivers, supply chain of key products and services, intangible within the group, Transfer Pricing policy towards intangibles and financing transactions. Rule-10DA prescribed detailed information to be furnished in Form: 3CEAA or/and Form: 3CEAB as per the conditions and manner provided in this rule.
- Local file: It is intended to provide detailed information about the local entity, its intraday-group transactions, the functional analysis etc. to determine Arm Length Price by local tax administration. Rule: 10D prescribed quite exhaustive information and documentation to be kept by the taxpayer where the aggregate value of international transactions exceeds ₹ 1 crore during the relevant previous year.
C: ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD) Transfer Pricing Guidelines
Three main objective of Transfer Pricing documentation:
- To ensure full disclosure by tax payer;
- To provide tax administration all information to conduct an informed Transfer Pricing risk assessment;
- To provide tax administration useful audited information alongside additional information to arrive Arm Length Price for transactions between Associated Enterprises.
D: Summary of Steps for preparing Transfer Pricing documentation:
Rule-10D(1) provides list of information and documents from clause (a) to (m) which are summarised as under:
- Profile of the Group
- Overview of Industry in which Group is in operation
- Details of Associated Enterprise
- Details of International transactions entered during the previous year
- Functional analysis of the transacting Associated Enterprises in relation to international transactions or the business activity/process.
- Documentation in support of functional analysis viz., agreements and contracts between Associated Enterprises or non-Associated Enterprises in similar transactions, letters and other correspondence, published financial statements of the Associated Enterprises. Etc.
- Economic analysis to determine Arm Length Price by selecting tested party, Most Appropriate Method (MAM), identification of comparable transactions both internal or external comparable and doing economic adjustments to improve the comparability.
E: Non-Compliance penalty to taxpayer
Here are the various penalty provisions for non-compliances of maintaining documents and reporting of international transactions:
- S-271AA (1): if taxpayer fails to keep and maintain information and documents as required by S-92D(1) I.e. local file and S-92D(2) I.e. master file; OR fainting report such transactions which he is required to do so; OR Maintaining and furnishing incorrect information and documents— 2% of value of International transactions.
- S-271AA(2): if taxpayer Fails to furnish the information and documents as required u/s 92D(4) I.e. Country by Country Reports —₹500,000
- S-271BA: If taxpayer fail to furnish report from an accountant in Form 3CEB as required by S-92E— ₹100,000
- S-271G: If taxpayer fails to furnish information and documents as required by tax authorities u/s 92D(3)— 2% of value of the international transaction.
- S-271GB: If taxpayer fails to furnish the report in Form 3CEAD u/s 286(2)— ₹5,000 per day, if the period of failure does not exceed 1 month and ₹15,000 per day, if failure continues beyond the period of 1 month. Further, ₹50,000 per day, if failure continues after levy of above penalty till finally complied.If taxpayer provides inaccurate information in CbC Reports furnished u/s 286(2)—INR 500,000.
Transfer Pricing regulations not only provides for robust system of maintaining and reporting of information and documents for international transactions between the associated enterprises but also mind-boggling penalties for not maintaining or incorrect maintaining the prescribed information and documents.
Note: Where ever section is used, it is with reference to Income Tax Act unless otherwise mentioned.
(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)
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