TP Planning, Documentation and Assistance in Compliances: An Overview
India has witnessed two major events this century: the rapid expansion of trade and investment and the growth of global connection networks. With the increasing competition, many multinational organisations are expanding their related party transactions to improve their supply chains. This has increased cross-border tax authority collaborations, which simultaneously entail opportunities and risks, making TP Planning, Documentation and Assistance in Compliances quite crucial for all business entities.
Transfer Pricingis the value at which the goods and services are transferred between separate divisions of the same company. In other words, Transfer Pricing refers to the price of transactions between related parties exercising common control, commonly referred to as intra-group transactions.
Transfer pricing transactions require proper compliance as the default in the same will result in the imposition of heavy penalties. To avoid these penalties, taxpayers should carry out a process of self-compliance which is a complex task incross-border transactions.
Objectives of Transfer Pricing Planning, Documentation and Compliance Assistance
It has the following objectives –
- To facilitate the evaluation of each company's division separately and generate separate profits for each division.
- Transfer pricing affects the reported profits of every centre as well as the allocation of the resources of the company. Hence, it becomes necessary to assess the cost incurred by each division because the cost incurred by one division will be considered as a resource for the other division of that company.
- Encourage the taxpayers to consider this as an essential practice to ensure proper filing of tax returns.
- Provide accurate information to facilitate risk assessment
Common Issues in Transfer Pricing faced by the Company
A company often faces issues regarding Transfer Pricing; some of the common issues are listed below-
- Difference of opinion among the divisional managers regarding the selection of the method to transfer pricing.
- Transfer pricing must be set in such a way that the company's accounting system is according to the transfer pricing rules. But, the companies often find transfer pricing planning to be an expensive and time-consuming process.
- Dysfunctional behaviour by the managers of the organisation unit due to the Arm's length prices.
- The value of transfer pricing set by the company is often not suitable for every division of the company because each division performs different functions.
- The Transfer pricing issue is a multinational setup which is considered quite complicated by the company.
Importance of Transfer Pricing Planning, Documentation and Compliance Assistance
Transfer Pricing Compliance is important due to the following reasons-
- It provides discretion to the MNC about the matters regarding the distribution of profits and expenses to the subsidiaries situated in different countries.
- Better Transfer Pricing Planning can help better the management, reporting and accounting of the company.
- Transfer Pricing Planning, Documentation and Compliance Assistance is important for a company involved in cross-border intercompany transactions as ithelps the company avoid any penalties resulting from lack of awareness.
- It can be time effective and cost-effective for the companies, and the procedure can be simplified to a great extent.
- It acts as proof of compliance with the Arm Length Principle.
- It ensures that the documentation is in Sync with the Form 3CEB, master file and CBC report.
Documentation required as per the Income-tax Act 1961
According to section 92 D of the Income Tax Act 1961, it is mandatory for every person entering into an international or domestic transaction to maintain the information and documents of the same.
The list of documents is provided under Rule 10D of the Income Tax Rules 1962
- Business description/ Profile of industry
- Ownership Structure
- Profile of the multinational group
- Details of the method are considered with reasons for rejecting other methods.
- Record of budgets, forecasts, financial estimates
- Terms and nature (inclusive of the price of the international transactions.
- Details of the functional analysis
- Records of the market and economic analysis
- Any other record of analysis (if any) to evaluate the comparability of international transactions with the uncontrolled transaction(s)
- Details of transfer pricing adjustment(s) made (if any)
- Any other information, e.g., data, documents like invoices, agreements, price-related correspondence
The flow of Transfer Pricing Documentation
The Transfer Pricing Documentation is done in the below-mentioned flow.
- Executive summary
- Industry analysis
- Company analysis Intercompany transactions
- Functional analysis
- Evaluation of methods
- Economic analysis
The above-mentioned flow is followed for the documentation of the local file, which is prepared by the company.
The ITR Department prepares the master file if the company fulfils the following criteria.
The aggregate value of international transactions is more than Rs. 50 Crores and the international group have consolidated revenue of Rs 500 crores for the accounting year, or the Aggregate value of international transactions related to the intangible property is more than Rs 10 Crore.
Country by Country Report
The ITR department files this report if the international group have a consolidated revenue of Rs 6,400 crores.
This is the 3 tier documentation structure for Transfer Pricing.
The companies who are applicable for transfer pricing must file the ITR by 30th November of the tax year, and the documents shall be prepared for a period of 8 yrs. which is calculated from the end of the relevant tax year and need to be updated annually on an ongoing basis.
Apart from this, it is important to get an independent accountant report in form 3CEB regarding the international transactions between AE Associated Enterprise, which shall be submitted by 30th November along with the ITR.
Penalties for Non-Compliance of the Transfer Pricing as per the Income Tax Act 1961
The penalties for non – compliance with the transfer pricing as per the tax legislation are given below-
According to this section, the company that fails to report the international transactions will have to bear the penalty for underreporting and would be liable for paying 50% of the amount of the total tax payable in case of underreporting and 200% in case of misreporting.
This section provides the penalty for non-maintenance of the proper documentation as per section 92D of the ITA 1961 or failure to record a transaction or furnishing wrong information or document. The defaulter shall be liable for the amount equivalent to 2 %of the value of the international transaction.
This section prescribes the penalty for failure to furnish documents as per section 92D (3) of the tax legislation, which is 2 % of the value of the international transactions.
This section states the penalty for failure to furnish an accountant report in form 3CEB as per section92E of the ITA 1961.
TP Planning, Documentation and Assistance in Compliances: Our Role
Enterslice can help the client in TP Planning, Documentation and Assistance in Compliances by the following –
Assessment of potential adjustments and penalties
Determine the exposure of transfer pricing adjustments, assist in minimising penalties, and help implement reporting standards.
Transfer Pricing Policy
Our team of professionals can help to plan a global transfer pricing strategy and optimise the results by allocating the assets, functions and risks in the specific jurisdiction.
To determine target profit margins based on the proposed scenario for utilising data from a proprietary database.
Valuation of Intangibles
To value intangibles of related parties
We Help to comply with Treasury Regulations to reduce the chances of transfer pricing adjustment to avoid potential assessment of penalties.
Represent on behalf of the taxpayer in coordination and submission of application with the competent authorities to reduce the double taxation risk, transfer pricing examinations and negotiation of Advance Pricing Agreements.