Tax On The Run
In this edgy pre-Budget season, anything to do with the taxman attracts undue attention, and some extreme reactions. So, if some are dubbing the move of the revenue and tax departments to scrutinise transfer pricing transactions for various multinationals as an act of “economic nationalism by an emerging economy”, the taxman’s target—the MNCs—are screaming blue murder. There are over 3,000 such cases (and rising) under litigation at the moment, something that is keeping an army of corporate legal experts, tax and accounting experts extremely busy.
Transfer pricing, a complicated piece of legislation, is the value assigned to transactions of goods, services, raw material and assets between a subsidiary and its parent company (across borders). Simply put, transfer pricing laws aim at allocating a company’s profits or losses to different tax jurisdictions. In India, transfer pricing was introduced in 2001 and several amendments and transactions have been included each year since then. “In India, the law is so subjective and open to interpretation that it causes huge issues as far as application is concerned,” says Dhaivat Anjaria, partner, transfer pricing, PwC India.
Recently, the tax department has raised questions about the undervaluing of fresh issues of shares for companies like Shell and Vodafone. Many tax experts say this is a desperate measure to garner revenues. “They are interpreting the fresh issuance of shares as income by saying it is like an interest-free loan from the Indian subsidiary to the parent. It’s ludicrous. What stops the I-T department from saying bonus shares are income then?” asks a top Mumbai-based tax lawyer. Most of these companies have already decided to contest these notices at the appellate tribunal.
Although none of the tax experts agree with this move to audit these transactions, they do concede that given how broad-based the definitions are, the department can choose to interpret these transactions in the way that they have. “The department sees a need for scrutiny in such cases and, based on that assessment, notices have been sent. It is within the purview of the law,” says a senior official at the I-T department.
The most common area of dispute has been advertising, marketing and brand promotion costs by the subsidiary, which seem to have benefited the parent brand. This has been the case with LG Electronics, for example. Tax lawyers claim that most of their clients are willing to pay the tax as long as they are clear on how the tax is valued and can prepare for it. At the moment, it is clear that the tax department neither has the bandwidth to resolve these issues nor are they qualified to undertake such valuations. That’s why most of these cases are going for long-drawn litigation.
“I don’t think there is a case to be made for economic nationalism here,” warns Anirudha Dutta, former executive director, CLSA. “Even Indian companies undertaking cross-border transactions with their subsidiaries are under scrutiny. Such opaque, subjective tax structures are definitely not encouraging for investments in the country.” The way forward seems to be in defining the extent of the law and eliminating any confusion on how it is applied. We’re a long way off from reaching that stage. For now, the only people gaining from the transfer pricing regime are the tax consultants and lawyers.
What is the reason for the government getting more aggressive on auditing transfer pricing, brand promotions and marketing of MNCs (A Cut Too Much, Mar 4)? It’s a fact that India’s laws on transfer pricing are complex and need a lot more interpretation.
A little shuffling of resources between jurisdictions is part of the fun of being a multinational.
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