Arm’s length standard

India: Tribunal decision on foreign exchange fluctuation gain or loss and arm’s length pricing

Posted on Updated on

The Income-tax Appellate Tribunal in the case of ACIT v. Rajratna Metal Industries Ltd. [ITA No. 1050/Ahd/2015 with CO No. 91/Ahd/2015, AY: 2010-11] held that a foreign exchange fluctuation gain/loss is an operating item and is not to be excluded for the purpose of computing the arm’s length price (ALP).

The Tribunal also found that income generated by the taxpayer on account of a business transaction which is not related to his international transactions (generation of electricity and sale to the manufacturing business) was not considered to be operating income for this purpose and must be excluded for the purpose of calculating the ALP. However, taking into account the taxpayer’s proposal, the Tribunal agreed to also exclude the expenditure related to that income.

Italy: Decree issued on urgent measures on tax matters

Posted on Updated on

The Council of Ministers of Italy enacted a Law Decree No.50 with an effort to meet the European Union (EU) demands of extra budget deficit cuts. The Decree was published in the Official Gazette on 24 April 2017 and provides urgent measures on tax matters.

The Decree excluded trademarks from the definition of intellectual property to comply with OECD Base Erosion and Profit Shifting (BEPS) Action 5 recommendations. Taxpayers wishing to take advantage of the patent box regime need to make an election by the end of the first financial year for which the regime is to apply. The election remains in force for five years-the year in which the application is filed and the following four financial years.

According to Decree the definition of normal value with the concept of arm’s length will be modified to be more aligned with Organisation for Economic Co-operation and Development (OECD) principles. The new definition formally endorses the OECD standard by providing that intercompany transactions are determined based on the conditions and prices that would have been agreed in comparable circumstances between independent parties acting at arm’s length.

Also, corresponding adjustments are now allowed for the conclusion of tax audits performed under international cooperation procedures, where the results are agreed by the tax authorities involved. Now it is also possible to obtain a corresponding adjustment through a specific application filed by an Italian taxpayer where a final adjustment has been made based on the arm’s-length principle in a country which has a double tax treaty in place with Italy that allows an acceptable level of information exchange.

Serbia: Ministry of Finance publishes rulebook on arm’s length interest rates

Posted on

The Serbian Ministry of Finance adopted the amendments to the Rulebook on arm’s length interest rates (the Rulebook) on 10 March 2017. The rulebook contains the prescribed interest rates for taxpayers who had or will have related-party financing during 2017.

According to Corporate Income Tax Law (CIT Law), in determining arm’s length interest expense or revenue, taxpayers can either use interest rates as prescribed by a rulebook from the Finance Ministry or elect to apply general OECD-based methods for assessment of arm’s length interest as prescribed by the corporate income tax law. The method selected must be consistently applied to all loans to or from related parties. Unlike the calculation of transfer pricing adjustments, taxpayers may apply prescribed rates and general methodology interchangeably in determining potential withholding tax exposure.

The Rulebook prescribes separate interest rates on long-term and short-term loans for all non-finance entities and a single interest rate for banks and finance lease companies.

The following table provides an overview of market interest rates as prescribed by the Ministry of Finance.

Taxpayer

EUR loans and RSD loans denominated in EUR (%)

banks and finance lease companies

3.13

other companies (short-term loans)

3.98

other companies (long-term loans)

4.25

The rulebook is effective as of 18 March 2017.

Singapore: IRS publishes Transfer pricing guidelines 2017

Posted on Updated on

The Inland Revenue Authority of Singapore published the 4th version of transfer pricing guidelines on 12 January 2017, demonstrating compliance with international transfer pricing standards.

The published guidelines explicitly refer to the Base Erosion and Profit Shifting (BEPS) Action Plans 8 – 10, supporting transfer pricing outcomes with value creation. According to the new guidance, profits will have to be taxed on that region where the real economic activities generating the profits are performed and the value is generated.

The IRAS provided more clarification to the risk element within the functional analysis in the application of the arm’s length principle. A more robust risk analysis is now needed to be performed for demonstrating that the entity has both the capacity and capability to assume and manage the specific economically significant risks from both a financial and operational perspective

The TP documentation requirements have been modified to adopt the BEPS Action Plan 13- Transfer Pricing Documentation. Accordingly, when the taxpayer is the ultimate parent company of a Singapore multinational enterprise (MNE), county-by-Country reporting(CbCR) will have to be filled in addition to the TP documentation.

Consistent with BEPS Action 5, there will be automatic exchange of Information on Unilateral APA (UAPA) by the IRAS with authorities of residence of all related parties with whom the taxpayer enters into transactions that are included by the UAPAs and the authorities of residence of the taxpayer’s ultimate parent entity and the immediate parent entity. The exchange of information will depend on certain conditions like having in place tax treaties or an exchange of information instrument.

The exchange of information will apply from December 2017 for UAPAs which are issued on or after 1 January 2012 and still in effect on 1 January 2015 and also for those treaties which are issued on or after 1 January 2015 but before 1 April 2017. The exchange of information will take place within three months after the date of agreement for UAPAs which are issued on or after 1 April 2017.

The IRAS has established the application of indicative margins for related party loans which are obtained or provided on or after 1 January 2017.

To facilitate compliance with the arm’s length principle and maintain a high level of adherence to the arm’s length principle, IRAS has put in place an indicative margin which taxpayers can apply on their related party loans obtained or provided from 1 January 2017. If taxpayers choose to apply the indicative margin for their related party loans, they are not expected to prepare TP documentation for related party loans below S$15 million (US$10.6 million). The indicative margin is 2.50% which is applicable for the period between 1 January 2017 and 31 December 2017.

India: Bench marking the arm’s length interest rate on related-party debt

Posted on Updated on

The Mumbai Bench of the Income-tax Appellate Tribunal held in the case of India Debt Management Pvt. Ltd. v. DCIT [IT(TP)A No. 7518/Mum/2014,  held that the selection of tested party shall be done with reference to the entity which has undertaken the transaction. Further, the Tribunal held that the interest rate on borrowings should be market determined and should be applicable to the currency in which loan is borrowed/repaid, to be considered at arm’s length.

The Income-tax Appellate Tribunal identified that the leading issue under consideration was the necessity to identify ‘tested part,’ while applying the CUP method bench-marking analysis done by the taxpayer is vitiated, simply because the taxpayer has not identified the ‘tested party’.

 

 

UK: Budget for 2016-2017 Updates Transfer Pricing Guidelines as Per Amended OECD Guidelines

Posted on Updated on

The UK budget for 2016-17 includes an update of the transfer pricing guidelines in line with OECD Guidelines. This measure amends from 1 April 2016 the references within the relevant legislation to incorporate the most recent revisions to the OECD Guidelines which are the internationally agreed standard for application of the arm’s length principle for transfer pricing purposes. This will ensure certainty for business and will reduce the possible double taxation.

India: Marketing & Sales Promotion Expenses Not International Transactions for Arm’s Length Standard

Posted on Updated on

The Bangalore Bench of the Income-tax Appellate Tribunal held in the case of: Essilor India vt. Ltd. v. DCIT [IT(TP) No. 29/Bang/2014 and IT(TP) No. 227 /Bang/2015] that advertising, marketing, and sales promotion expenses to promote brand value were incurred only for increasing the taxpayer’s sales, and not those of the foreign related party. Accordingly, even when these expenses were greater than those of comparable companies, without an agreement between the taxpayer and the foreign related party, these expenses was not an “international transaction” and, as such, the arm’s length price standard does not arise.

The advertisement, marketing and sales promotion expenditure was not included as part of the cost base for computing the Profit Level Indicator. The Tribunal therefore directed the Transfer Pricing Officer to include these expenses as part of the cost base for the purpose of determination of arm’s length price.