Transfer pricing disputes may return to haunt MNCs soon | Economic Times

Mumbai: Companies may face transfer pricing disputes due to data unavailability used as inputs in computing tax liabilities on intra-group transactions as the protracted lockdown, enforced to prevent the spread of the virus, has shifted the reporting calendar for several companies. Transfer pricing is a tax levied on Indian subsidiaries and captives of multinationals for cross-border transactions within the group. Most companies arrive at an amount of tax they are required to pay to the Indian revenue department based on certain computations and assumptions. This year, the calculations on arms-length basis transactions and comparables have become tough due to unavailability of the data, say tax experts. These computations are mainly based on two factors. First, how many overseas transactions were recorded between the Indian arm, its parent or any other foreign company or arms length. Second, whether the amount paid or received by the Indian arm is on a par with industry standards – or comparable.Both these assumptions are based on numbers available in the company’s audited results and audited results of other companies in the sector or competitors. “As the deadline for AGMs and consequently the filing of audited results has been postponed due to the COVID pandemic, sufficient comparable data would not be available on a timely basis in the public domain for this year. Taxpayers would surely face problems in obtaining comparable data and hence the benchmarking exercise would be difficult to conduct. It would be better if the government provides relaxation in the transfer pricing filing deadline for this year,” said Amit Maheshwari, Partner, AKM Global. Indian entities of many multinationals receive a fixed margin or a mark-up from their parents and a tax is paid on these transactions in India. Transfer pricing is essentially the price paid by the parent company or its foreign arm to a local subsidiary for transactions among them. In most cases, the local entity charges a mark-up at arm’s length, or at a price as per industry average. Tax experts say that the calculation cannot be based on last year’s data too as most multinationals have seen huge value erosion due to Covid. “There are several problems this time around availability of required data for the purposes of testing companies’ international transactions for arm’s length standard. First, the audited internal company data which forms the basis for implementing transfer pricing method (in computing margins) may not be available due to extension of the timeline, and second, there is limited industry data to form basis to account for potential adjustment warranted for the impact of pandemic during the last quarter, i.e., January to March 2020, for benchmarking purposes,” said Kunj Vaidya, a CA specialising in transfer pricing.78439338