Transfer Pricing: Expectations from the Union Budget 2024

The Union Budget 2024, the first major policy announcement of the BJP-led NDA government since securing a third term, is scheduled to be presented on 23 July. Following are some key amendments and suggestions pertaining to transfer pricing (TP) worth considering.

Expectation of taxpayers

Relaxation under Section 94B of the Income-tax Act (the Act)

For many multinational enterprises (MNEs) desirous of setting up operations in India (specifically from sectors that are typically heavy on debt funding such as real estate, power, and infrastructure), the preferred route for investment is either through debt or borrowing within India with guarantees from the overseas parent.

Section 94B of the Act provides a limitation on the deduction of interest expense paid to related parties in case the said interest exceeds 30% of the EBITDA.

Making a suitable amendment in Section 94B of the Act to provide exceptions for specific industries mentioned above, which are largely dependent on debt funding, would significantly help in promoting the inflow of foreign capital into India.

Allowability of downward adjustment in case of Advance Pricing Agreement (APA)

An APA is an agreement between the Government and the taxpayer that defines the pricing mechanism for international related-party transactions. Presently, the tax provisions do not allow a downward adjustment in case the pricing finally agreed in the APA is lower than the amount already offered to tax.

Since the objective of the APA is to eliminate double taxation and provide economic relief/ certainty to the parties, allowance of a downward adjustment would be welcome. Accordingly, the insertion of an appropriate amendment in the Act to factor in the consequent refund of tax would be required.

Anticipated announcements

Incorporation of Pillar Two tax regime into the Act

The overarching objective behind the introduction of the Global Anti Base Erosion (GloBE) Rules under Pillar Two is to provide for an Effective Tax Rate (ETR) of 15% across all jurisdictions in which in-scope MNEs operate (consolidated group revenue exceeding EUR 750mn).

After the calculation of ETR for each jurisdiction, in case of jurisdictions with ETR less than 15%, top-up tax can be levied as follows:

  ➢ By the concerned jurisdiction vide Qualified Domestic Minimum Top-up Tax (QDMTT) for the tax shortfall

  ➢ Through Under Taxed Profits Rule (UTPR) in the subsidiary jurisdiction, i.e, denying deductions or making equivalent adjustments

  ➢ Specific QDMTT/ UTPR rules would need to be introduced in the domestic tax regime of respective jurisdictions.

  ➢ In case QDMTT/ UTPR rules are not incorporated within the domestic tax law of a jurisdiction, such shortfalls in tax can be levied on the parent entity under the Income Inclusion Rule (IIR) provided in the Pillar Two guidelines.

It is anticipated that the upcoming Budget would initiate India's adoption of the Pillar Two tax regime into the Indian tax laws.

Operationally, the inclusion of Pillar Two in the Act would require considerable amendments regarding QDMTT, UTPR, and IIR, along with clear guidance from the Central Board of Direct Taxes on implementation.

Faceless Assessment/ Appeal Scheme

The Faceless Assessment Scheme and Faceless Appeal Scheme were introduced w.e.f. April 2021 and April 2022 respectively, to transform tax litigation.

It was announced that the coverage would be gradually broadened to include TP matters as well as appeals before the Income-tax Appellate Tribunal (ITAT). Given the pendency of appeals, coupled with the fact that the ITAT is the final fact-finding authority, it would be intriguing to see how the mechanism of faceless appeals is integrated.

The adoption of faceless assessments has thrown up a variety of practical challenges for the taxpayer, such as receipt of erroneous notices, the requirement to upload voluminous data within defined file-size constraints, technical issues in the video conferencing platform affecting the opportunity of being heard, a large number of pending appeals, etc.

It is pertinent to note that in TP, there is significant focus on business aspects of the taxpayer impacting the pricing, which the tax authority needs to understand and appreciate. Hence, the quality of the video conferencing platform needs to be upgraded and adequate time needs to be provided for virtual hearings.

The Government's intention to incorporate TP proceedings and ITAT appeals into the faceless scheme will be a welcome move. However, it is imperative that its framework is developed considering the aforementioned practical challenges.

Certainty in taxation relating to international related-party transactions will go a long way in providing confidence to MNEs to invest in India, providing a boost to foreign direct investments in India.

Source:- Taxmann