What are TP Controversies and Dispute Resolution Management?

Narendra Kumar

05 Sep, 2022

Transfer Pricing (TP) and Dispute Resolution reports the complexity, valuation and administrative tinges, and cultural impacts of resolving this important cross-border issue when tax disputes arise. In recent years, transfer pricing has become in financial terms the most important tax issue faced by multinational companies and tax authorities worldwide.

As experienced in recent years, when tax authorities are challenged for revenue, the handling of these issues requires great care, skill, creativity and a true awareness of the ramifications confronting each tax jurisdiction. The varied approaches to the administrative resolution of these issues, including specific alternative dispute resolution mechanisms and the effective uses of Advance Pricing Agreements; correlative adjustment procedures in the event of transfer pricing modifications; cross-border exchange of information concerns; & how to proceed to litigation if all else fails administratively. Unfortunately, today litigation is on the rise in numerous jurisdictions and the presumption of an administrative resolution is no longer correct.

Transfer Pricing regulations, companies are commonly subject to audits by TP officers wherein Transfer Pricing investigations could be rather time-consuming & which might involve a substantial commitment of resources for assembling the paperwork, preparing responses and dealing with local tax authorities.

Step by Step Analysis of Transfer Pricing Controversies and Dispute Resolution Management?

 A major risk international business^] transactions face is potential double taxation by multiple tax authorities. Most tax treaties negotiated between countries provide a mechanism to avoid double taxation. Multinationals can file a Mutual Agreement Procedure^[1] (MAP) claim requesting the relevant fiscal authorities to resolve disputes concerning double taxation.

Safe Harbour (“SH”) provisions under TP regulations with a view to reducing litigation was introduced. SH is defined to mean circumstances in which the income tax authorities shall accept the transfer price declared by the taxpayer subject to the fulfillment of certain prescribed conditions. The eligibility, feasibility and period for which the SH option is to be exercised, assist with the procedural requirements relating thereto, & the same requires to comply with the prescribed SH norms.

An Arm’s Length Price is an agreement between the tax authorities and the taxpayer that determines
in advance the most appropriate TP methodology or the Arm’s Length Price (“ALP”) for the covered intercompany international transactions. The same has brought greater certainty in these taxing times by stemming the tide of burgeoning controversies and drawn out TP litigation. The Indian TP regulations provide the option of unilateral/bilateral/multilateral APAs with optional pre-filing consultations.
Rollback provisions have also been introduced in the regulations and taxpayers now have an option to exercise Rollback provisions for up to four financial years preceding the first year covered under the APA.

The factors driving intensified scrutiny of transfer pricing arrangements are beyond the control of most companies, but the risks to your organization are very real. They include:

• Large tax reassessments — with important penalties & interest on overdue tax & double taxation on income when relief under tax treaties is not available;
• Uncertainty about your worldwide tax burden, and expensive, time-consuming conflicts with regulatory authorities;
• Damage to reputation and corporate brand is seen as a bad corporate citizen.

Read our article:GST Appeals and Dispute Settlement

Audit and Dispute Prevention Technique

• Build defense strategies into business structures and operations
• Engage with tax authorities upfront to gain certainty, such as entering into pre-filing agreements and advance pricing agreements (APAs)
• Perform ‘health check’ analyses and identify potential risk areas as early as possible
• Conduct ‘mock audits’ of specific issues and structures
• Coordinate ‘course of conduct’ reviews to ensure that post-structuring operations align with initial implementation plans
• Develop master impact statements, including the quantitative and qualitative impact of positions
• Prepare transfer pricing documentation and standard operating procedures for transactions
• Prepare thorough defense files in anticipation of audits or disputes of transactions or operations
• Assist with proper documentation of major transactions
• Coordinate document identification, collection, and centralization procedures

Conclusion

Enhanced tax transparency, tax efficiency, and improved tax dispute resolution mechanisms, driven in part by the OECD’s (The Organisation for Economic Co-operation and Development) base erosion and profit shifting initiatives. In this worldwide tax environment, taxpayers are facing a number of new challenges that are in turn creating increased uncertainty.

The source of these challenges is primarily attributable to enhanced enforcement actions by tax administrations to increase revenues and address budget gaps. These actions are focused on engaging in aggressive audit and examination tactics, implementing unilateral measures that diverge from international standards, promulgating transparent reporting requirements, and developing robust risk assessment tools. As a result, there has been a substantial increase in the number and size of tax audits and disputes worldwide, placing a further strain on the resolution of treaty-related disputes and increasing the risk of double taxation.

Bigger the risk & uncertainty causes taxpayers to re-evaluate their tactic to proactively prepare for and resolve tax audits and disputes. This necessarily requires a multidisciplinary approach that utilizes tax and legal service providers with a global reach that is highly credentialed and well equipped to appropriately assist taxpayers in all stages of the tax dispute and controversy lifecycle.

Read our article:An Overview of New Legacy of Dispute Resolution Scheme