Union Budget 2021:  Global firms, Indian MNEs better off with predictable tax regime, transfer pricing certainty

Union finance minister Nirmala Sitharaman.

The economy crippled by the pandemic is showing signs of a rebound. Finance Minister Nirmala Sitharaman will have to craft her Budget to balance growth with raising revenues for the government to fund the fiscal deficit. The current geopolitical situation is also likely to have a bearing on policy decisions.

India continues to be poised to maximise foreign investment, emerge as a manufacturing/export hub and contribute significantly to the world economy.

Global and Indian multinational enterprises while focussing on business want a predictable tax regime and often regard transfer pricing as a key risk for cross-border transactions and structures. It would be a welcome move if the Budget proposals focussed on the following issues.

Reducing tax disputes and providing certainty

Tax disputes in India are protracted and expensive. Around Rs 6 trillion is stuck in just direct tax litigation in courts and tribunals. Corporate taxpayers lament the lack of any time frame to . Swiftly addressing potential disputes and providing certainty is critical.

The task force on India’s new direct tax code had recommended a mediation framework to provide taxpayers an opportunity of a negotiated settlement.

Introducing this forum could help to shorten the tax controversy lifecycle and reduce pressure on the judicial machinery. The forum should be appropriately staffed, provided with sufficient decision-making powers and mandated to co-develop a collaborative solution with the taxpayer to increase its chances of success. It would also supplement India’s successful Advance Pricing Agreement (APA) programme and provide long-lasting transfer pricing certainty.

The APA programme itself could be further strengthened —

• by bringing in a separate fast track channel for APA renewals
• by keeping regular transfer pricing assessment proceedings of covered years in abeyance till the conclusion of the APA to preclude more disputes piling up and adding to the backlog
• by relaxing the restrictions on APA rollbacks

It may also be prudent to usher in the concept of block audits whereby a number of years are scrutinised together. Transfer Pricing is less tax and more factual and business-driven. Assessing the profits of a company over a period of time and comparing its performance to industry comparable would present a better picture to the tax department.

This is preferred over examining every year independently without taking into consideration business cycles and economic realities.

Easing compliance burdens and simplifying rules

Foreign companies receiving royalties, interest and service fee are subject to withholding tax in India. The government has provided them with an exemption from filing tax returns where due tax has been paid at statutory rates. However, these companies continue to be subject to Indian transfer pricing laws leading to onerous compliance burden. These transactions are in any case substantiated in the Indian taxpayer’s transfer pricing documentation and assessed as a part of it.

Exempting the foreign company from similar compliance would ease the pressure on multinational enterprise (MNE) groups.

MNE groups subject to certain monetary thresholds are required to file Master File and Country-by-County Report (CbCR) in India. These thresholds and the rules surrounding them may be refined to reduce additional compliance burdens on smaller taxpayers and preclude any inadvertent inclusions due to the way the law is worded.

Supporting debt financing

Following the OECD Base Erosion and Profit Shifting (BEPS) project recommendations, interest limitation provisions were brought into the Indian tax law. Presently, the interest paid on related party loans (or loans guaranteed by
related parties) is allowed as deduction subject to a 30 percent of EBITDA rule.

The excess interest can be carried forward for a period of eight years. Every business is likely to have working capital needs and will actively look to raise debt to navigate the pandemic-triggered disruption. Furthermore, infrastructure development will be a key priority area requiring funding. It may be an opportune time to

• Consider expanding the exclusion list (for interest limitation applicability) to capital intensive industries with long gestation projects,
• Provide a moratorium on the application of this provision for years impacted by the pandemic
• Completely eliminate the carry forward timeframe of eight years or stretch the carry forward period
• Clarify implicit guarantees are not covered by this provision to preclude potential disputes

This Budget should be used as an opportunity to trigger an economic revival and lay a strong foundation for the future. Expectations run high.

The writer is Tax Partner, EY.