<h2>Executive Summary</h2><ul><li><p>Under the OECD’s BEPS framework, companies with revenues exceeding 750 million euros face a minimum 15% tax rate.</p></li></ul><ul><li><p>If a country fails to collect this amount, business must follow the well-established hierarchy for residual collections on a country-by-country basis.</p></li><li><p>The use of technology for TP processes is driven by tax authorities’ requests for data and the growing ‘exchange of information’ between jurisdictions.</p></li></ul><ul><li><p>India’s approach to TP issues in some cases leads to unnecessary demands by the tax authorities on foreign companies.</p></li><li><p>India tends to not follow the OECD format for cost allocation, but rather the ‘safe harbour’ principle. In many cases, APAs can help settle longer-term tax issues.</p></li></ul>.<h2><strong>Transfer Pricing Landscape in a Digital World</strong></h2><p>In a digital world, transfer pricing (TP) dynamics are constantly being disrupted and CFOs must grapple with ever-greater complexity on this front. At a recent India CFO Forum session in Delhi, Vijay Iyer, Partner and National Leader, Transfer Pricing at EY India, shared insights on how companies are dealing with TP disputes and the role of advanced pricing agreements (APAs) in that. He also shared his views on recent developments in the area of base erosion and profit shifting (BEPS), especially its 2.0 version.</p><h2><strong>Application of BEPS Pillar 2</strong></h2><p>Under the BEPS framework, companies with revenues exceeding 750 million euros face a minimum 15% tax rate. If their taxation or that of their subsidiaries in any jurisdiction falls below 15%, the difference has to be paid, and the country housing the global headquarters can collect the differential amount. In cases where the ‘parent country’ lacks the required enabling legislation, these rights transfer to the location of the sister concern, and if not, to countries hosting any subsidiary firms. MNCs must be aware of this hierarchy as most countries will aim to meet the 15% threshold.</p><p>However, the 15% rate is not a straightforward calculation and involves over 200 line-items, as defined by the OECD. Differential taxes owed by India are calculated on the basis of these guidelines, which may differ from domestic financial statements. This necessitates recalculating financial statements using the OECD formula as well as the Effective Tax Rate (ETR) for each subsequent jurisdiction. Additionally, adjustments related to intra-group intellectual property (IP) transfers and variations in deferred tax asset calculations often require a duplication of effort. On the flipside, this offers an opportunity for India to provide outsourced tech-enabled solutions on a bigger scale.</p><h2><strong>Technology’s Role In TP Processing</strong></h2><p>· Globally, tax authorities are both demanding more information from businesses and sharing more information with each other.</p><p>· This is driving and will continue to drive, technology transformation within companies.</p><p>· Companies are spending increasing amounts of money, time and management effort in responding to demands for information. Investing instead in data collation and automation at the audit stage can yield substantial time and cost savings.</p><p>· Three key areas where technology plays a crucial role are inter-group services, data segmentation and transparency enhancement efforts.</p><p>· This shift highlights the significance of data retention policies and anticipates a rise in information sharing in the future.</p><h2><strong>India’s TP Landscape</strong></h2><p>Tax complexity is increasing worldwide, but when it comes to international transactions, many countries adhere to the OECD format for cost allocation. The OECD standards emphasise transparency and require detailed cost explanations, allocation rationale and auditing. Generally, however, the authorities accept most transactions – unless the charges exceed cost plus 5%. In India’s case, though, there are inconsistencies in the treatment of intergroup services. Resultantly, many companies struggle to justify their structures, which results in challenges, and later, settlements at the assessment stage. Double taxation and voluntary payments are common worldwide. While instruments such as the Multilateral Instrument (MLI) offer solutions, India’s tax disputes often focus on minor issues, clogging the system. Further, the Indian legal system relies on APAs, MAPs and safe harbour agreements. In most cases, safe harbour agreements enable charges below Rs 100 million (plus 5%) without extensive evidence.</p><h2>APA Processes</h2><p>Despite its time-consuming nature – often spanning 3-4 years – APAs offer an effective long-term solution. However, they may not suit all situations. Additionally, some businesses actually prefer litigation as an alternative means to avoid immediate premiums, which might result in double taxation. The APA process is also generally perceived as intrusive and excessively demanding. However, it can be effective in terms of establishing stable margin calculations with the tax authorities, eliminating the fluctuations in tax rates across jurisdictions. APAs may not, however, be practical in cases marked by unresolved contentions among the concerned jurisdictions. In such instances, litigation is often a viable option, potentially culminating in a MAP applicable to both countries involved.</p>
<h2>Executive Summary</h2><ul><li><p>Under the OECD’s BEPS framework, companies with revenues exceeding 750 million euros face a minimum 15% tax rate.</p></li></ul><ul><li><p>If a country fails to collect this amount, business must follow the well-established hierarchy for residual collections on a country-by-country basis.</p></li><li><p>The use of technology for TP processes is driven by tax authorities’ requests for data and the growing ‘exchange of information’ between jurisdictions.</p></li></ul><ul><li><p>India’s approach to TP issues in some cases leads to unnecessary demands by the tax authorities on foreign companies.</p></li><li><p>India tends to not follow the OECD format for cost allocation, but rather the ‘safe harbour’ principle. In many cases, APAs can help settle longer-term tax issues.</p></li></ul>.<h2><strong>Transfer Pricing Landscape in a Digital World</strong></h2><p>In a digital world, transfer pricing (TP) dynamics are constantly being disrupted and CFOs must grapple with ever-greater complexity on this front. At a recent India CFO Forum session in Delhi, Vijay Iyer, Partner and National Leader, Transfer Pricing at EY India, shared insights on how companies are dealing with TP disputes and the role of advanced pricing agreements (APAs) in that. He also shared his views on recent developments in the area of base erosion and profit shifting (BEPS), especially its 2.0 version.</p><h2><strong>Application of BEPS Pillar 2</strong></h2><p>Under the BEPS framework, companies with revenues exceeding 750 million euros face a minimum 15% tax rate. If their taxation or that of their subsidiaries in any jurisdiction falls below 15%, the difference has to be paid, and the country housing the global headquarters can collect the differential amount. In cases where the ‘parent country’ lacks the required enabling legislation, these rights transfer to the location of the sister concern, and if not, to countries hosting any subsidiary firms. MNCs must be aware of this hierarchy as most countries will aim to meet the 15% threshold.</p><p>However, the 15% rate is not a straightforward calculation and involves over 200 line-items, as defined by the OECD. Differential taxes owed by India are calculated on the basis of these guidelines, which may differ from domestic financial statements. This necessitates recalculating financial statements using the OECD formula as well as the Effective Tax Rate (ETR) for each subsequent jurisdiction. Additionally, adjustments related to intra-group intellectual property (IP) transfers and variations in deferred tax asset calculations often require a duplication of effort. On the flipside, this offers an opportunity for India to provide outsourced tech-enabled solutions on a bigger scale.</p><h2><strong>Technology’s Role In TP Processing</strong></h2><p>· Globally, tax authorities are both demanding more information from businesses and sharing more information with each other.</p><p>· This is driving and will continue to drive, technology transformation within companies.</p><p>· Companies are spending increasing amounts of money, time and management effort in responding to demands for information. Investing instead in data collation and automation at the audit stage can yield substantial time and cost savings.</p><p>· Three key areas where technology plays a crucial role are inter-group services, data segmentation and transparency enhancement efforts.</p><p>· This shift highlights the significance of data retention policies and anticipates a rise in information sharing in the future.</p><h2><strong>India’s TP Landscape</strong></h2><p>Tax complexity is increasing worldwide, but when it comes to international transactions, many countries adhere to the OECD format for cost allocation. The OECD standards emphasise transparency and require detailed cost explanations, allocation rationale and auditing. Generally, however, the authorities accept most transactions – unless the charges exceed cost plus 5%. In India’s case, though, there are inconsistencies in the treatment of intergroup services. Resultantly, many companies struggle to justify their structures, which results in challenges, and later, settlements at the assessment stage. Double taxation and voluntary payments are common worldwide. While instruments such as the Multilateral Instrument (MLI) offer solutions, India’s tax disputes often focus on minor issues, clogging the system. Further, the Indian legal system relies on APAs, MAPs and safe harbour agreements. In most cases, safe harbour agreements enable charges below Rs 100 million (plus 5%) without extensive evidence.</p><h2>APA Processes</h2><p>Despite its time-consuming nature – often spanning 3-4 years – APAs offer an effective long-term solution. However, they may not suit all situations. Additionally, some businesses actually prefer litigation as an alternative means to avoid immediate premiums, which might result in double taxation. The APA process is also generally perceived as intrusive and excessively demanding. However, it can be effective in terms of establishing stable margin calculations with the tax authorities, eliminating the fluctuations in tax rates across jurisdictions. APAs may not, however, be practical in cases marked by unresolved contentions among the concerned jurisdictions. In such instances, litigation is often a viable option, potentially culminating in a MAP applicable to both countries involved.</p>
