Tax Update Detail
Customs departments work closer to vet MNC transfer pricing
MUMBAI: The days of information arbitrage may just be over for many companies. The special valuation branch of the customs department is scrutinising transfer pricing methodologies of several multinationals with a view to reconcile their tax and import-export submissions.
Until now, MNCs used to file separate transfer pricing positions to both departments, one for taxation purpose and the other for international trade.
Since the two departments wouldn't share data with each other, companies could get away with the information arbitrage in some cases, said people in the know of the matter.
Transfer price is basically a price charged by a subsidiary or a division of a company to another. Rules suggest that there has to be an ‘arm’s length’ while fixing this price so that it’s not too low or too high than the existing open market price. Tax officers can question and demand tax in case they suspect that firms are escaping taxes.
The customs department too has its own valuation mechanism whereby it checks the price of imports and exports to subsidiaries outside India.
“Collaboration between the customs and income tax department was initiated a few years ago; it’s only recently that we have seen that data and information provided by businesses to one is being used by the other more frequently,” said Pratik Jain, partner and national leader, indirect taxation, at PwC India. “While the objectives of the departments could be different, there could be disputes where multinationals may see their methodologies and positions challenged by either of the departments.”
Tax experts said often the objective of the customs department was to challenge the arm’s length pricing and check if companies were underquoting prices. For the tax department, it is to see if the arm’s length price quoted by a company was high and should be lower.
Arm’s length pricing usually is an industry average price at which companies buy and sell goods. For the first time in 2016, the customs department sought details from MNCs about their transfer pricing positions with the tax department. While no notices have been issued so far, that could happen in some cases in the coming months, said industry trackers.
“Customs circulars (on valuation) issued in early 2016 mandate submission of transfer pricing reports apart from other relevant valuation-related information.
Given that the methodology under both laws for a given transaction could be different, this could be an area of disconnect from an SVB (special valuation branch) proceedings standpoint,” said Suresh Nair, partner at EY India.