Transfer Pricing
Documentation
March 2015
1
Contents
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
© 2015 Deloitte Touche Tohmatsu India Private Limited
2
TP Documentation
Section 92D read with Rule 10D
Rule
10D (1) (a)
10D (1) (b)
10D (1) (c)
10D (1) (d)
Description of the Rule 10D
A description of the ownership structure of the assessee enterprise („AE‟) with details of shares
or other ownership interest held therein by other enterprises
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
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
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
3
TP Documentation
Section 92D read with Rule 10D
Rule
10D (1) (h)
Description of the Rule 10D
A record of the analysis performed to evaluate comparability of uncontrolled transactions with
the relevant international transaction
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
10D (1) (i)
appropriate method along with the explanations as to why such method was so selected, and
how such method was applied in each case
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
10D (1) (j)
adjustments, if any, which were made to account for difference between internationals
transactions, or between the enterprises entering into such transactions
The assumptions, polices and price negotiations, if any, which have critically affected the
10D (1) (k)
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
© 2015 Deloitte Touche Tohmatsu India Private Limited
4
Summary of TP Documentation
Section 92D and Rule 10D
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.
•
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
Snapshot of contents of TP
Documentation
© 2015 Deloitte Touche Tohmatsu India Private Limited
6
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:
ABC Inc
•
About ABC Ltd and its AE/ related
party:
‒ Date of Incorporation
‒ Shareholding structure
ABC
Holdings Inc.
‒ Principal activity
Outside India
India
ABC Ltd
© 2015 Deloitte Touche Tohmatsu India Private Limited
XYZ Ltd
8
Industry Overview - Examples
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
© 2015 Deloitte Touche Tohmatsu India Private Limited
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
9
Functional analysis - Examples
Captive service provider
Particulars
ABC
AEs
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
√
-
√
√
√
√
-
√
√
√
-
√
√
√
√
√
Functions
© 2015 Deloitte Touche Tohmatsu India Private Limited
10
Functional analysis - Examples
Contract manufacturer
Particulars
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
© 2015 Deloitte Touche Tohmatsu India Private Limited
ABC
AEs
√
√
√
-
-
√
√
-
√
-
√
√
√
√
√
√
√
√
√
√
-
11
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:
Particulars
Prowess
Description
•
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
© 2015 Deloitte Touche Tohmatsu India Private Limited
13
Economic analysis
Foreign Database (Illustrative list):
Particulars
AMADEUS
COMPUSTAT
Description
•
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
•
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
14
Background of BEPS
Project
© 2015 Deloitte Touche Tohmatsu India Private Limited
15
Global Tax Revolution
•
Currently MNCs are facing a number of new challenges, including:
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
This new global tax environment has resulted in the following actions – a Global Tax
Revolution:
Change in tax
authorities‟
approach
OECD‟sto
BEPS
interpretation
project
of tax law and
tax treaties
© 2015 Deloitte Touche Tohmatsu India Private Limited
Changing
behaviours of
OECD‟s
tax authorities
BEPS project
re tax treaties
and tax laws
16
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)
© 2015 Deloitte Touche Tohmatsu India Private Limited
17
BEPS objectives: a new global tax environment
© 2015 Deloitte Touche Tohmatsu India Private Limited
18
BEPS Timetable
09/2014
09/2015
12/2015
• Digital economy
• Controlled Foreign Corporation (CFC) rules
• Interest deductions – phase 2
• Hybrid mismatches
• Permanent establishments
• Harmful tax practices – phase 3
• Harmful tax practices – phase 1
• Interest deductions – phase 1
• Multilateral instrument – phase 2
• Treaty abuse
• Harmful tax practices – phase 2
• Intangibles
• Risk and capital, other high-risk transactions
• Transfer pricing (“TP”) documentation
• Disclosure of aggressive tax planning
• Multilateral instrument – phase 1
• Dispute resolution
• Data collection and analysis measuring BEPS
© 2015 Deloitte Touche Tohmatsu India Private Limited
19
Objectives of TP Documentation
ENSURE CONSIDERATION OF TP REQUIREMENTS
1
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
2
3
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.
© 2015 Deloitte Touche Tohmatsu India Private Limited
20
Proposed Compliance
Documentation
© 2015 Deloitte Touche Tohmatsu India Private Limited
21
Proposed Compliance Documentation
• New guidelines adopt 3-tiered approach
Country-by-Country
Template
• Key financial
information on all group
members on an
aggregate country basis
with an activity code for
each member
Master File
Local File
• Key information about
the group's global
operations including a
high-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
• 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.
© 2015 Deloitte Touche Tohmatsu India Private Limited
22
CbC Reporting &
Templates (including focus
on recent OECD Guidance)
© 2015 Deloitte Touche Tohmatsu India Private Limited
23
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:
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
Revenues
(related,
unrelated,
total)
Tangible
assets other
than cash &
cash
equivalents
Profit/loss
before
income tax
Information
required by tax
jurisdiction
(aggregate for all
entities including
PEs)
Stated capital
&
Accumulated
earnings
Income tax
paid (cash) &
accrued
Number of
employees
© 2015 Deloitte Touche Tohmatsu India Private Limited
24
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
© 2015 Deloitte Touche Tohmatsu India Private Limited
28
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.
© 2015 Deloitte Touche Tohmatsu India Private Limited
29
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.
© 2015 Deloitte Touche Tohmatsu India Private Limited
30
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?
© 2015 Deloitte Touche Tohmatsu India Private Limited
31
Master & Local File
© 2015 Deloitte Touche Tohmatsu India Private Limited
32
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
© 2015 Deloitte Touche Tohmatsu India Private Limited
33
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
© 2015 Deloitte Touche Tohmatsu India Private Limited
34
Master File compared with Rule 10D
Constituents of Master File
Presence in Rule 10D
Organizational structure of the MNC
Description of MNC‟s business
Broadly covered under Rule 10D (1) (a), Rule 10D (1) (b)
and Rule 10D (1) (c)
MNC‟s intangible
Not 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
© 2015 Deloitte Touche Tohmatsu India Private Limited
35
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
© 2015 Deloitte Touche Tohmatsu India Private Limited
36
Local File compared with Rule 10D
Constituents of Local File
Information relating to local entity
Information relating to controlled
transactions of the local entity
Presence in Rule 10D
Broadly covered under Rule 10D (1) (a), Rule 10D (1) (b)
and Rule 10D (1) (c)
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
© 2015 Deloitte Touche Tohmatsu India Private Limited
37
Master File & Local File (content and interrelation)
Local File
Master File
1. Organizational Structure
1. Local Entity
•
•
Local organization chart and management structure
•
List of key competitors
•
Detailed description of the business and business strategy
pursued (including business restructurings or intangible transfers)
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
3. Group’s Intangibles
•
Description of the overall strategy for development and exploitation
of intangibles including Group TP policies re R&D and intangibles
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 of important Group intangibles with the list of (a) entities legally
owning them and (b) important intragroup agreements
•
List and description of selected comparable uncontrolled transactions
relied on in the TP analysis and possible adjustments performed
•
Important transfers of interests in intangibles within the Group
•
Copy of APAs or tax rulings to which local tax jurisdiction is not a party
but impacting relevant controlled transactions
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
Deloitte
Tax & Consulting
•© 2014
Annual
consolidated
financial statement
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
38
Compliance Issues
Penalties
Language
Confidentiality
Frequency of
Documentation
Updates
Other Issues
Compliance
Issues
Contemporaneous
Documentation
Retention of
Documents
Materiality
© 2015 Deloitte Touche Tohmatsu India Private Limited
Timeframe
39
Deloitte refers to on or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a
legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited
and its member firms
This material and the information contained herein prepared by Deloitte Touche Tohmatsu India Private Limited (DTTIPL) is intended to provide general
information on a particular subject or subjects and is not an exhaustive treatment of such subject(s). None of DTTIPL, Deloitte Touche Tohmatsu Limited, its
member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this material, rendering professional advice or services. The information
is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that
might affect your personal finances or business, you should consult a qualified professional adviser.
No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this material.
©2015 Deloitte Touche Tohmatsu India Private Limited
Member of Deloitte Touche Tohmatsu Limited
40