Changes to disclosure requirements for publicly traded corporations in India have raised the compliance burden for tax directors analysing RPTs and adhering to TP regulations.
The revisions to the Securities and Exchange Board of India's listing duties and disclosure rules that went into effect in April 2022 make it difficult for listed firms in India to detect related party transactions.
“Taxpayers need to have additional approval from shareholders for inter-company transactions. The problem now is in case there are transactions between subsidiaries, they also need to be approved,” says a manager at a big four advisory firm in Mumbai.
“It’s an onerous compliance,” adds the manager.
SEBI LODRs, which were first implemented in 2015, were updated in April of this year in order to develop more stringent compliance standards and improve corporate governance in India.
However, the April changes expanded the scope of the related party definition. The audit committee now evaluates RPTs even if the listed firm is a subsidiary of the relevant party.
It has caused several TP issues for businesses.
First, it has become difficult for public businesses to quickly identify RPTs.
Sagar Wagh, international tax and TP export consultant at EY in Mumbai, states that businesses are even considering automated options to find RPTs in order to reduce "unwanted compliance leakage."
Arrangements at arm's length
SEBI LODRs have raised the compliance burden for enterprises required to approve RPTs in accordance with the arm's-length norm due to the rise in corporate governance.
According to the manager of one of the "big four" accounting firms, a large number of customers listed on the stock exchange have engaged in current activities.
“They would be some form of TP policies and process in place, and they are re-aligning them to meet the additional requirements,” adds the manager.
Subsidiaries engaging in regulated transactions must guarantee that they adhere to the arm's-length principle or they risk being questioned by tax authorities.
It is also possible for companies to fail to identify inter-company transactions or impacted subsidiaries.
“It will be difficult to get it [the transaction] approved by shareholders of entities,” says the manager.
The SEBI LODRs will be amended to safeguard shareholders by preventing their companies from engaging in transactions with related parties. However, listed corporations will be required to publish a separate report for shareholders.
A variety of concerns
However, the TP problems posed by reporting requirements and shareholders' expectations for evidence of the arm's-length character of controlled transactions are far from over.
In reality, according to Wagh, the Indian TP environment remains problematic despite the increase in tax authority probes.
“TP audits are now focused on qualitative issues and the investigation undertaken by authorities in relation to taxpayers’ business and functional profiles are more in-depth,” he explains.
Jimmy Spencer, the chief financial officer of the engineering and construction business Chemtex in India, believes that tax uncertainty exists in the country due to the inefficiency of dispute resolution mechanisms such as advance pricing arrangements (APAs).
“There’s a big problem. The safe harbour rules are onerous. The arm’s-length pricing is more stringent than what could be negotiated,” says Spencer.
Sandip Mistry, the head of tax at BASF in Mumbai, believes that outstanding applications for APAs should be a priority for tax authorities in India, as the degree of pendency remains notably high.
“The delay on concluding APAs will only lead to accumulation of litigation before the authorities” says Mistry.
In accordance with Action 13 of the BEPS project and OECD guidelines, India's transfer pricing legislation require companies to submit a master file and country-by-country reporting. But some disclosure requirements exceed OECD recommendations.
Companies are required to report all entities of international groups, the functional and risk analysis of constituent entities contributing at least 10 percent of the group's revenues, assets, and profits, and information on the entities engaged in the development and management of intangible property.
Wagh notes that they must also offer a full account of the multinational group's funding arrangements, including the names and addresses of the top 10 unrelated lenders.
“Indian taxpayers have to satisfy the additional reporting requirements. Failure to meet them may attract penal consequences as the master file may be treated as incomplete,” he says.
In addition to India's reporting obligations, the recent growth of global capability centres (GCCs) has added to the complexity of TP.
These facilities, which combine personnel and infrastructure, have emerged as alternatives to domestic headquarters.
According to the Economic Times, between April 2021 and March 2022, more than 100 international corporations want to establish GCCs in India.
Mistry explains that GCCs in India are often arrangements wherein, for instance, a German-headquartered business could establish a shared service centre that supplied services to group companies worldwide.
“Under the GCC set-up, the Indian GCC could either be remunerated directly by the respective group companies globally or the German parent company may accumulate all the costs and remunerate the Indian GCC with appropriate markup,” says Mistry.
The Indian TP laws have ramifications for these arrangements, which must be handled.
According to Wagh, companies will need to correctly portray GCC functions, and TP compensation structures will need to correspond with the activities conducted by GCCs.
Just the beginning
Indian firms are only beginning to feel the effects of a developing tax climate as a result of the TP problems posed by the growth in corporate governance and the emphasis on qualitative concerns.
The increase of GCCs, audits, and revisions to SEBI LODRs exemplify the jurisdiction's efforts to comply with OECD worldwide standards and enhance tax transparency and certainty.
In the interim, organisations will need to ensure they adhere to the arm's-length norm and continue to identify the relevant parties engaged in transactions in order to fulfil the increased compliance burden. It may merely be the beginning of fresh TP troubles.
By fLEXI tEAM