OECD TP-Guidelines on business restructuring - Enigma of 'Exit Charge' & Indian landscape

August 04,2017
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Anis Chakravarty (Partner, Deloitte Touche Tohmatsu India Pvt. Ltd.)

Bhupendra Kothari (Senior Director, Deloitte Haskins & Sells LLP)

Background - Amendments to Chapter IX of the Transfer Pricing Guidelines

In the context of transfer pricing relevance, business restructuring refers to the cross-border reorganisation of the commercial or financial relations between associated enterprises, including the termination or substantial renegotiation of existing arrangements or understanding.

Business restructurings, which may primarily be driven out of business compulsions, are frequently under scrutiny from a tax avoidance perspective and in recent times have garnered much attention from tax authorities across the globe. In order to establish common international guidance on how to deal with business restructuring, OECD[1] in their July, 2010 report introduced Transfer Pricing (“TP”) aspects of business restructuring, which was updated in the revised Guidelines released in July, 2017[2] prompted by the changes to the Guidelines set out in the 2015 Base Erosion and Profit Shifting Reports, specifically the 2015 BEPS Report on Actions 8-10, "Aligning TP Outcomes with Value Creation," and on Action 13, "TP Documentation and CbC Reporting."

Both the revised OECD Guideline and UN TP Manual[3] admit that there is no legal or universally accepted definition of business restructuring, however both recognize that it includes termination or substantial renegotiation of existing arrangements. Therefore the first step in analysing the TP aspects of a business restructuring is to accurately delineate the transactions that comprise the business restructuring. The aspects which are focussed upon are commercial or financial relations and the conditions attached to those relations that lead to a transfer of value among the members of the Multinational enterprises (“MNE”) group.

MNE groups often carry out business restructuring for commercial and business reasons – to maximise synergies, to streamline the management of business lines and to improve the supply chain efficiency. However, it is important to note that any such restructuring has a tax relevance, particularly from an Indian perspective. The focus of this article is on evaluating the tax impact emanating from such restructuring and discuss the ambit of transfer pricing provisions of the Indian Income Tax Act, 1962 (“the Act”) to cover such transactions.

The Enigma of ‘Exit Charge’ and Guidance on Arm’s Length Compensation

Chapter IX of the OECD guidelines notes that in restructuring, tangible or intangible assets might be transferred, or valuable business contracts might be terminated or renegotiated typically leading to a reallocation of profits among the members of the MNE group. The OECD notes that, between unrelated parties, these transfers might result into a compensation; which is what is meant by an ‘exit charge’.

Exit charges have been a source of concern around the globe both from a tax authority and MNE viewpoint. There are no consistent views on the business restructuring and exit charges across the globe. The Australian Tax Authorities have briefly commented on this in the guidelines released by it on 9-Feb-2011. The same are broadly consistent with the OECD in terms of risk allocation, compensation for a restructure and disregarding the actual restructuring arrangements.


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