OECD’s CbCR risk assessment Handbook– A veracious indicator to Tax Administrations : Part 2

February 14,2018
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Arun Chhabra (Director, Grant Thornton Advisory Private Limited)

Balaji Ravindran (Manager, Grant Thornton India LLP)

The Indian Transfer Pricing Regulations have evolved over the years, since its inception in 2001 till recent times, with the introduction of secondary adjustments and implementation of CbCR and Master File. The Transfer Pricing landscape in India is viewed as one of the most aggressive regimes in the world with the number of cases in dispute steadily increasing. The most prevalent issues under dispute are in respect of advertising, marketing and promotion expenditure, availing management support services, imputing notional interest on outstanding receivable balance, grant of economic adjustments and so on and so forth.

With a view to focus on cases with complex issues, India had recently shifted from a quantitative approach to a risk based system for selection of cases for transfer pricing scrutiny. While the paradigm shift towards risk based assessment has resulted in a significant reduction in the number of transfer pricing assessments, the transfer pricing adjustments have broadly remained the same.

One of the key factors contributing to prolonged litigation is not providing the specific information called for by the revenue authorities during the course of assessment. In many instances, the revenue Authorities require the taxpayer to submit details of the overseas Group, so as to have a clear understanding of the roles and responsibilities of each of the Group members, the complexities of the functions performed and risks assumed by each of the Group members. However, the revenue authorities seldom receive the said information as these are not readily available neither with the taxpayer nor with the Group entities and adding to the complications, even if the information is available, Group entities are reluctant to share these details.

With the CbCR and Master File regulations in place from the financial year 2016-17, the Indian revenue authorities will be able to analyse the Global structure of the large MNEs operating in India, either from the Group directly or from a foreign tax authority by way of exchange of information. This would enable the Indian revenue authorities to understand the structure of the Group's business in a way that was not possible before. With such a voluminous and critical information of the MNE in place, it is essential for the revenue authorities to factor in the following while conducting a CbCR assessment.

  • Emphasis should be on complex issues: The revenue authorities should keep in mind that they should invest significant time in evaluating the voluminous data, the information relevant to their jurisdiction, applying risk assessment tools and in identifying risk flags. Therefore, the revenue authorities should shift their focus towards evaluating the complex transfer pricing risks emanating from the CbCR, rather than evaluating every piece of information.
  • CbCR is only a risk assessment tool and not a means to make adjustment: CbCR is only a tool for identifying high level transfer pricing risk assessment and should not be used for making transfer pricing adjustments based on a global formulary apportionment of income.
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