Appropriate transfer pricing strategy can aid survival & help chart growth, says global tax expert Akshay Kenkre while adding that the deep consultation with clear definitions and an equally clear implementation process would have helped the introduction of the equalisation levies.
COVID-19 has disrupted the normal ways of doing business in multiple ways. As supply chains unravel and reform, it is also upending existing business and tax calculations. Persistent but localised lockdowns have spread the impact (and often the losses) unevenly across the demand and supply lines for multinational enterprises. The transfer pricing agreements and strategies are under review as geopolitics and geo-economics affect global trade.
Akshay Kenkre, the founder of specialist tax advisory firm, TransPrice shares some of his thoughts on the way forward. TransPrice focuses on transfer pricing and global taxation matters. Edited excerpts:
Q: How does the Indian tax regime (especially transfer pricing and global tax norms) look like in these stressful COVID-19 times?
A: COVID-19 times are indeed stressful times. In such times, a country should partner with the business or an individual in reducing the stress rather than increasing the same. Deferment of deadlines of tax compliance or reduction of interest rate on tax deducted at source (TDS) are important measures to relieve stress but it is a drop in the ocean in comparison to what other economies had to offer for COVID-19 related tax measures.
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From a transfer pricing point of view, possibly the tax administration could look at widening the range concept for FY 2020-21, bringing in lower safe harbours, covering additional transactions in safe harbours, provide a one time COVID-19 related deduction in generally understood margins, accelerating advance pricing agreements (APA) programmes and renewal of APAs with new critical assumptions, ensuring APAs are not treated invalid due to COVID-19 related changes in the critical assumptions etc could be some of the measures.
I think it is the time to showcase to the global world the stability and togetherness that India has to offer on a business front despite COVID-19 related disruptions. It is time to make the right policy decisions.
Q: China in recent months is on the backfoot as far as intellectual property protection is concerned. And IP is a key intangible in the TP context. How does India look to global investors in this context?
A: I have never seen a foreign multinational suggesting that we keep IP in India as a preferred destination. While the IP protection is of a concern in China, the global IP leaders still undertake major business with the Chinese.
In transfer pricing, the business value is where the IP is. It is high time that India realises the value of IP law and IP protection. The comparison is between having an IP law which does not ensure protection or is tweaked (as in China), versus a weak IP protection law in totality (as in India). India needs to strengthen its IP regulation and emerge as a hub for IP and arbitration. This needs urgent attention especially in legal studies and strengthening and reform of the judicial outlook to the economy.
Q: In the post COVID-19 world, how critical is transfer pricing strategy for an Indian enterprise?
A: The year 2020 is the year of survival for businesses affected by COVID-19 (travel for instance) and the year of innovation and growth for the businesses that received a stimulus due to unprecedented circumstances (tech companies).
In both cases, transfer pricing acts as a tool that aids survival techniques as well as a partner in a multinational enterprise’s growth trajectory. Some aspects worth considering for an Indian MNE are:
Global landscape review: An in-depth review of the global value chain and supply chain is required to understand the profitability packets and potential areas. In case a certain part of the machinery of the supply chain is getting impacted due to COVID-19, then appropriate management decisions could be taken to control the impact and steer the business on its right course. Examples of such decisions could be to evaluate captive units around the globe and understand the level of attention the profit pools derive in the respective captives.
Industry review: It is of utmost importance and necessity to foremost evaluate the behaviour of the industry in which you function. If the industry is doing well, while your business is nose-diving, then there could be some inherent fault in your MNE structure or even your transfer pricing model that needs control and evaluation.
Group structure: Businesses are always evolving. It is important to understand whether it is appropriate to bring out a new business structure or whether the group itself needs to restructure its global business in a way that covers from the risk emanating from COVID-19.
For example, decisions around whether a group feels that instead of applying a limited risk model in various countries, a full risk model is beneficial in certain circumstances such that the respective country risk does not fall back on the parent’s support and finances.
Documentation: Every business or transfer pricing decision undertaken needs to be supported with documentation. Details maintained in such difficult or opportunist times help the MNE navigate its course during the transfer pricing audits and assessments say three years hence.
Q: What has been the outcome of the country-by-country (CbC) reporting so far as India’s claim on the global value chain is concerned?
A: The results of CbC are not publically available. However, the legislation has been well received by many Indian MNEs. Business is undertaken for the right reasons and structures are built keeping in mind business substance. CbC has brought transparency and discipline in undertaking global business by MNEs. The claim on the global value chain is mainly on account of the technology business, where the customers are situated in India and the business of technology companies are built offshore, thereby eroding the base of tax from India. Equalisation levy 1.0 and 2.0 are now implemented in law until the time there is global consensus on the issue of the digital economy.
Q: What is the future of the equalisation levy 2.0 in the Indian context? Do you expect it to last?
A: My view is that the equalisation levy 2.0 is an interim measure until a global consensus emerges on the tax measures of the digital economy. The longevity of the taxes would be based on the net value-added collection that it has to offer to the Indian tax collection. Net value-added collection is tax collection minus the compliance costs to manage and implement such a tax levy. Also, building an audit mechanism around such a levy is of crucial significance.
With companies like Google investing $10 billion through a roadmap for the development of Indian digital infrastructure, it is questionable whether such a give and take relationship could be the best means to sort the digital tax issue. In other words, compensating the tax revenue through capital investments in the country leading to employment generation and other economic factors.
Q: What to your mind would have been a good way of introducing the equalisation levy?A: The best way to introduce Equalisation Levy would be through a consultation process and with clear definitions and implementation process. In the past, we have seen the implementation around General Anti-Avoidance Rules (GAAR) regulations, which found its place in tax law in 2012, yet were not enacted until 2017 and yet waiting for implementation. Currently, there are so many questions around the loosely framed law of Equalisation levy, while the multinationals which are both Indian and foreign multinationals functioning in India are losing sleep due to such legislation which is aimed at taxing foreign oriented companies.