Post on 08-Sep-2018
Contents
© 2015 Deloitte Touche Tohmatsu India Private Limited 2
Particulars Page No
Transfer Pricing (TP) Documentation 3
Summary of TP Documentation 5
Snapshot of contents of TP Documentation 6
Background of BEPS Project 15
Proposed Compliance Documentation 21
CbC Reporting & Templates (including focus
on recent OECD Guidance)23
Master & Local File 32
Section 92D read with Rule 10D
TP Documentation
3
Rule Description of the Rule 10D
10D (1) (a)A description of the ownership structure of the assessee enterprise („AE‟) with details of shares
or other ownership interest held therein by other enterprises
10D (1) (b)
A profile of the MNC group of which the assessee enterprise is a part along with the name,
address, legal status and country of tax residence of each of the enterprises comprised in the
group with whom international transactions have been entered into by the assessee and
ownership linkages among them
10D (1) (c)A broad description of the business of the assessee and the industry in which the assessee
operates, and of the business of the AE with whom the assessee has transacted
10D (1) (d)The nature and terms (including prices) of international transactions entered into with each
AE, details of property transferred or services provided and the quantum and the value of each
such transaction or class of such transaction
10D (1) (e)A description of the functions performed, risks assumed and assets employed or to be
employed by the assessee and by the AE involved in the international transaction
10D (1) (g)
A record of the uncontrolled transactions taken into account for analysing their comparability
with the international transactions entered into, including a record of the nature, terms and
conditions relating to any uncontrolled transaction with third parties which may be of relevance to
the pricing of the international transactions
© 2015 Deloitte Touche Tohmatsu India Private Limited
Section 92D read with Rule 10D
TP Documentation
© 2015 Deloitte Touche Tohmatsu India Private Limited 4
Rule Description of the Rule 10D
10D (1) (h)A record of the analysis performed to evaluate comparability of uncontrolled transactions with
the relevant international transaction
10D (1) (i)
A description of the methods considered for determining the arm‟s length price (ALP) in relation
to each international transaction or class of transaction, the method selected as the most
appropriate method along with the explanations as to why such method was so selected, and
how such method was applied in each case
10D (1) (j)
A record of the actual working carried out for determining the ALP, including details of the
comparable data and financial information used in applying the most appropriate method, and
adjustments, if any, which were made to account for difference between internationals
transactions, or between the enterprises entering into such transactions
10D (1) (k)The assumptions, polices and price negotiations, if any, which have critically affected the
determination of the ALP
10D (1) (l)Details of the adjustments, if any, made to transfer prices to align them with ALP determined
under these rules and consequent adjustment made to the total income for tax purposes
10D (1) (m)Any other information, data or document, including information or data relating to the AE, which
may be relevant for determining ALP
Section 92D and Rule 10D
Summary of TP Documentation
• Contemporaneous documentation requirement
• Needs to be filed within 30 or 60 days when called for
• Detailed documentation is not required to be maintained if the aggregate value of all international transactions does not exceed INR 1 Cr/ Specified Domestic Transactions does not exceed INR 20 Crs (Budget 2015)
© 2015 Deloitte Touche Tohmatsu India Private Limited 5
Entity related
• Profile of industry
• Profile of group
• Profile of Indian entity
• Profile of AEs
Price related
• Transaction terms
• Functional analysis (functions, assets and risks)
• Economic analysis (method selection, comparable benchmarking)
• Forecasts, budgets, estimates
Transaction related
• Agreements
• Invoices
• Pricing related correspondence (letters, emails, etc.
Executive Summary
• Introduction about the company
• Overview of the business:
‒ Main activities of the group
‒ Main activities of the company
• Economic Analysis:
‒ Summary of International transactions and SDT
‒ TP method
‒ Value of transaction
‒ Margin of the company
‒ Margin of comparable companies
• Conclusion (whether the transactions are in accordance with the arm‟s length standard,
as required under the TP regulations or not)
© 2015 Deloitte Touche Tohmatsu India Private Limited 7
Overview of the Group
Overview of the group:
• About ABC Ltd and its AE/ related
party:
‒ Date of Incorporation
‒ Shareholding structure
‒ Principal activity
© 2015 Deloitte Touche Tohmatsu India Private Limited 8
ABC Inc
ABC
Holdings Inc.
ABC Ltd XYZ Ltd
Outside India
India
Industry Overview - Examples
© 2015 Deloitte Touche Tohmatsu India Private Limited 9
Retail Industry
• Brief description of the Industry
• Global scenario:
‒ Major players in the industry
‒ Profitability margins
‒ Factors affecting the industry
‒ Market share of the company
‒ Demographics and consumer spending
habits
• Indian scenario:
‒ Outlook of the industry in India
‒ Growth forecasts
‒ Demographics and consumer spending
habits
• Key Growth Drivers of the ABC company:
‒ Govt. laws and regulations
‒ Economic reforms
‒ Developments in E-commerce
• Future Outlook
IT/ ITES
• Background – IT support service / ITES
industry
• Global sourcing trends – IT spending/
Market growth
• IT support service – Indian scenario
• ITES industry - Indian scenario
• Risks & challenges
• Future outlook - Emerging trends & new
opportunities in IT industry
Captive service provider
Functional analysis - Examples
© 2015 Deloitte Touche Tohmatsu India Private Limited 10
Particulars ABC AEs
Functions
Conceptualization, processes/ framework/ - √
Execution √ -
Review/ monitoring - √
Change management - √
Training - √
Assets employed
Routine tangible assets √ √
Intangible assets - √
Risks borne
Service liability risk - √
Capacity utilization risk - √
Market risk - √
Manpower risk √ -
Credit risk - √
Foreign exchange risk - √
Contract manufacturer
Functional analysis - Examples
© 2015 Deloitte Touche Tohmatsu India Private Limited 11
Particulars ABC AEs
Functions
Supply of raw materials √ -
Provision of the licensed technology for manufacturing - √
Manufacturing formulations √ -
Provision of written instructions regarding quality control
procedures- √
Supply and delivery of products √ -
Compliance with all relevant local regulations √ -
Assets
Tangible assets √ -
Intangible assets - √
Risks
Market Risk - √
Product Liability Risk √ √
R&D Risk - √
Credit Risk - √
Inventory Risk - √
Foreign Exchange Fluctuation Risk - √
Legal and Statutory Risk √ -
Economic analysis
• Selection of tested party
• Selection of the most appropriate method:
‒ Comparable Uncontrolled Price method
‒ Resale Price method
‒ Cost Plus method
‒ Profit Split method
‒ Transaction Net Margin method
‒ Other method
• Selecting Profit Level Indicators:
‒ Benchmarking analysis
‒ Price/ margin of the company
‒ Price/ margin of comparable companies
‒ Adjustment for differences between enterprises
• Conclusion (whether the transactions are in accordance with the arm‟s length standard,
as required under the TP regulations or not)
© 2015 Deloitte Touche Tohmatsu India Private Limited 12
Economic analysis
Carrying out a search using publicly available databases
Indian Database:
© 2015 Deloitte Touche Tohmatsu India Private Limited 13
Particulars Description
Prowess • Database comprises:
‒ All companies traded on India's major stock exchanges
‒ Several others including the central public sector enterprises
• Database covers most of the following:
‒ Organised industrial activities
‒ Banking
‒ Organised financial and other services sectors in India
• Companies covered in Prowess account for:
‒ Seventy-five per cent of all corporate taxes
‒ Over 95 per cent of excise duty collected by the Government of
India
Capitaline
Neo
• Listed & un-listed companies classified under more than 300 industries
Economic analysis
Foreign Database (Illustrative list):
© 2015 Deloitte Touche Tohmatsu India Private Limited 14
Particulars Description
AMADEUS • AMADEUS is an independent database of European companies
produced by Bureau van Dijk
• The AMADEUS DVD holds information derived from annual
returns on over 3 million public and private companies
COMPUSTAT • Standard & Poor's Compustat North America is a database of US
and Canadian fundamental and market information on more than
30,000 active and inactive publicly held companies
© 2015 Deloitte Touche Tohmatsu India Private Limited
• Currently MNCs are facing a number of new challenges, including:
• This new global tax environment has resulted in the following actions – a Global Tax
Revolution:
Global Tax Revolution
Perception that
MNCs are not paying
fair share of taxes
Loss of trust between
tax authorities and
business
Loss of trust between
tax authorities in
different countries
OECD‟s
BEPS project
Change in tax
authorities‟
approach to
interpretation
of tax law and
tax treaties
Changing
behaviours of
tax authorities
re tax treaties
and tax laws
OECD‟s
BEPS project
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© 2015 Deloitte Touche Tohmatsu India Private Limited
Introduction to BEPS
• 19 July 2013: OECD released its Action Plan in regard to Base Erosion and Profit Shifting
(BEPS), to coincide with the G20 Finance Leaders meeting in Moscow
• Action Plan:
− Is ambitious : it consists of 15 specific actions “to prevent corporations from paying
little or no tax” (OECD press release)
− Is consensus-based : it has been “signed off” (at the political level) by all 34 OECD
member countries and the 8 G20 countries which are not OECD members
− Has a relatively short timetable : all actions are to be completed by December 2015
(with many of the actions having earlier deadlines)
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BEPS objectives: a new global tax environment
18© 2015 Deloitte Touche Tohmatsu India Private Limited
BEPS Timetable
09/2014 09/2015 12/2015
• Digital economy
• Hybrid mismatches
• Harmful tax practices – phase 1
• Treaty abuse
• Intangibles
• Transfer pricing (“TP”) documentation
• Multilateral instrument – phase 1
• Controlled Foreign Corporation (CFC) rules
• Permanent establishments
• Interest deductions – phase 1
• Harmful tax practices – phase 2
• Risk and capital, other high-risk transactions
• Disclosure of aggressive tax planning
• Dispute resolution
• Data collection and analysis measuring BEPS
• Interest deductions – phase 2
• Harmful tax practices – phase 3
• Multilateral instrument – phase 2
19© 2015 Deloitte Touche Tohmatsu India Private Limited
Objectives of TP Documentation
1
2
3
ENSURE CONSIDERATION OF TP REQUIREMENTS
Taxpayers must give appropriate consideration to TP
requirements in establishing prices and other conditions for
intragroup transactions and in reporting the income derived
from such transactions in their tax returns.
TP RISK ASSESSMENT
Provide tax administrations with the information necessary to
conduct an informed TP risk assessment.
TP AUDIT
Provide tax administrations with useful information to employ in
conducting a TP audit. Additional information might be
delivered during audit progress.
20© 2015 Deloitte Touche Tohmatsu India Private Limited
© 2015 Deloitte Touche Tohmatsu India Private Limited
Proposed Compliance Documentation• New guidelines adopt 3-tiered approach
Country-by-CountryTemplate
• Key financial information on all group members on an aggregate country basis with an activity code for each member
Master File
• Key information about the group's global operations including ahigh-level overview of a company’s business operations along with important information on a company’s global TP policies with respect to intangibles and financing
Local File
• Information and support of the intercompany transactions that the local company engages in with related parties
Local law will determine the language in which the documentation must be submitted.
Countries are encouraged to permit filing in commonly used languages and request
translation after submission.
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CbC Reporting &
Templates (including focus
on recent OECD Guidance)
23© 2015 Deloitte Touche Tohmatsu India Private Limited
© 2015 Deloitte Touche Tohmatsu India Private Limited
Country-by-Country (CbC) Reporting
Reporting Requirement & Templates
• CbC reporting requires MNCs to report annually and for each tax jurisdictions in which
they do business the following:
Information required by tax
jurisdiction (aggregate for all entities including
PEs)
Revenues (related,
unrelated, total)
Profit/loss before
income tax
Income tax paid (cash) &
accrued
Number of employees
Stated capital &
Accumulated earnings
Tangible assets other than cash &
cash equivalents
CbC template is
intended to be used
for risk assessment
purposes only
CbC report is not a
conclusive evidence
on whether transfer
prices are
appropriate or not
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© 2015 Deloitte Touche Tohmatsu India Private Limited
CbC Reporting
Sources of Financial Data
• Flexibility to choose organized sources as long as source is consistently used from year
to year
− If using statutory P&L, amounts should be translated to functional currency of the
reporting company at average exchange rate for the year
• Include description of source and explanation for changes in sources
• Not necessary to reconcile revenue, profit and tax reporting in the CbC template to the
consolidated P&L
• Not necessary to make adjustments for differences in accounting principles applied
among tax jurisdictions
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© 2015 Deloitte Touche Tohmatsu India Private Limited
CbC Reporting
Recent OECD Guidance on CbC Reporting Implementation (1/2)
• OECD on February 6, 2015 released guidance on the implementation of TP
documentation and CbC reporting. Guidance provides answers to taxpayers‟ questions
regarding the:
− timing of preparation and filing of the CbC report
− which companies will be subject to the reporting requirements
− the use of the CbC report by jurisdictions
− the mechanisms for government-to-government exchange of CbC reports
• Timing of preparation and filing:
− The first CbC reports will be required to be filed for MNE fiscal years beginning on
or after January 1, 2016.
− MNCs will be allowed 1 year from the close of the fiscal year to which the CbC
report relates to prepare and file the CbC report, the first CbC reports would be filed
by 31 December 2017.
− It should be noted that the MNE fiscal year relates to consolidated reporting period
for financial statement purposes, not to taxable years or the financial reporting
periods of individual group entities.
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© 2015 Deloitte Touche Tohmatsu India Private Limited
CbC Reporting
Recent OECD Guidance on CbC Reporting Implementation (2/2)
• Threshold:
− The guidance requires CbC reporting by MNCs with annual consolidated group
revenues above EUR 750 million.
• Use of the CbC report by jurisdictions:
− In terms of the appropriate use of the information in the CbC report, the guidance
states that jurisdictions will commit to use the CbC report for assessing high-level
TP and other BEPS risks, but should not propose adjustments to income on the
basis of an income allocation formula based on CbC report data.
− However, jurisdictions would not be prevented from using the CbC report
information as the basis for making additional inquiries into the MNC‟s TP
arrangements, which arguably is the goal of the OCED‟s current CbC initiative.
• Mechanisms for government-to-government exchange of CbC reports:
− The countries participating in the BEPS project have agreed that they will have in
place and be prepared to enforce legal protections of the confidentiality of the
information in the CbC report equivalent to those under the Multilateral Convention
on Mutual Administrative Assistance in Tax Matters, a tax information exchange
agreement (TIEA) or a tax treaty.
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© 2015 Deloitte Touche Tohmatsu India Private Limited
CbC Reporting
Key Considerations / Implications
• Presents organized view of where the MNC earns income and pays taxes
• Presents where people and assets are located in relation to the income earned and
taxes paid
− High priority for countries that cannot get information under current rules
− Intended for risk assessment
• Will template result in
− Value chain analysis with people and tangible assets as the driver?
− Greater use of profit splits?
− Increased emphasis on Location Specific Advantages?
− Profit comparison between countries with similar functional and risk profile?
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© 2015 Deloitte Touche Tohmatsu India Private Limited
Master File
Broad Overview
• Should be available to all tax jurisdictions
• Five sections
− Organizational Chart
− Description of the Company‟s Business
− Company‟s Intangibles
− Intercompany Financial Activities
− Financial and Tax Position
• Can be prepared on an overall company basis or line of business wise
• Intended to present: global operations and policies for IP and financing
• Materiality standards should be objective and commonly understood in commercial
practice
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© 2015 Deloitte Touche Tohmatsu India Private Limited
Master File
Key Considerations/ Implications
• New information required will require new processes to obtain and refresh data
• New requirements include
− Supply chain chart for the five largest products and service offerings plus other
products or services amounting to more than 5% of a MNC‟s sales
− Important intangibles or groups of intangibles and which entities own them
− Unilateral income allocation rulings and APAs
• New level of global transparency – increased scrutiny of TP audits
− Examiners may focus on broader aspects and structure beyond intercompany
transactions currently reported
• Likely will require more central control of IT and TP policies
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© 2015 Deloitte Touche Tohmatsu India Private Limited
Master File compared with Rule 10D
Constituents of Master File Presence in Rule 10D
Organizational structure of the MNCBroadly covered under Rule 10D (1) (a), Rule 10D (1) (b) and Rule 10D (1) (c)
Description of MNC‟s business
MNC‟s intangibleNot specifically covered under Rule 10D, however, intangibles relating to the Indian operations are required to be described under Rule 10D (1) (e)
MNC‟s inter-company financial activities Not covered under Rule 10D
MNC‟s financial and tax position Not covered under Rule 10D
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© 2015 Deloitte Touche Tohmatsu India Private Limited
Local File
Broad Overview
• Contains information traditionally found in TP documentation
• New requirements
− Description of management structure, local organization chart and description of to
whom local management reports and country of offices
− Details on intercompany transactions and financial information
− Comparable companies need only be refreshed every three years if the functional
profile of the company has not changed
− Use of local rather than regional comparables, if available and appropriate
− Disclosure of bilateral APAs and rulings
Key issue for the future is whether local countries will impose additional requirements for the
local file that will require additional costs to prepare locally tailored documentation reports
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© 2015 Deloitte Touche Tohmatsu India Private Limited
Local File compared with Rule 10D
Constituents of Local File Presence in Rule 10D
Information relating to local entity Broadly covered under Rule 10D (1) (a), Rule 10D (1) (b) and Rule 10D (1) (c)
Information relating to controlled transactions of the local entity Covered under Rule 10D (1) (d) to Rule 10D (1) (m) -
except details relating to unilateral/ bilateral APAs and similar rulings
Financial information of the local entity
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Master File & Local File (content and interrelation)
© 2014 Deloitte Tax & Consulting
Master File
1. Organizational Structure
• Chart with Group legal & ownership structure and geographical
location of operating entities
2. Description of the Group’s Business(es)
• Important drivers of business profits
• Description of important business restructuring transactions
• Description of supply chain for 5 largest products / services
• List and brief description of important group service arrangements
• Brief functional analysis describing the principal contributions to
value creation by individual group entities
4. Group Intercompany Financial Activities
• Group‟s financing arrangements and related TP policies
• Identification of central financing entities
5. Group’s Financial & Tax Positions
• List of relevant APAs and tax rulings relating to the allocation of
income among countries
• Annual consolidated financial statement
1. Local Entity
• Local organization chart and management structure
Local File
• Detailed description of the business and business strategy
pursued (including business restructurings or intangible transfers)
• List of key competitors
2. Controlled Transactions (not exhaustive)
• Amount of intra-group payments and receipts involving the local entities
broken down by jurisdiction of the foreign payer / recipient
• List of associated enterprises involved in controlled transactions and
relationships
• Detailed comparability & functional analysis with copies of all material
intercompany agreements
• Indication of the most appropriate TP method selected
• List and description of selected comparable uncontrolled transactions
relied on in the TP analysis and possible adjustments performed
• Copy of APAs or tax rulings to which local tax jurisdiction is not a party
but impacting relevant controlled transactions
3. Group’s Intangibles
• Description of the overall strategy for development and exploitation
of intangibles including Group TP policies re R&D and intangibles
• List of important Group intangibles with the list of (a) entities legally
owning them and (b) important intragroup agreements
• Important transfers of interests in intangibles within the Group
3. Financial Information
• Annual local entity financial accounts
• Information and allocation schedules showing link between financial
data used in TP method and annual financial statements
• Summary schedules and sources of relevant financial data for
comparables used
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© 2015 Deloitte Touche Tohmatsu India Private Limited
Compliance Issues
Compliance Issues
Penalties
Confidentiality
Other Issues
Contemporane-ous
Documentation
TimeframeMateriality
Retention of Documents
Frequency of Documentation
Updates
Language
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