Arm’s length standard
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.
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.
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.
|EUR loans and RSD loans denominated in EUR (%)|
banks and finance lease companies
other companies (short-term loans)
|other companies (long-term loans)||
The rulebook is effective as of 18 March 2017.
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
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.