Submission to Ministry of Finance to consider revision in Advance Pricing Agreements (APAs) and mark-ups under Safe Harbour Rules

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Submission to Ministry of Finance to consider revision in Advance Pricing Agreements (APAs) and mark-ups under Safe Harbour Rules

Tejasvi

@tejasvi

May 22, 2020

Public Policy

516

As you are aware, spread of Novel Coronavirus (COVID- 19) and the resulting economic slowdown has ripple effects across a range of markets hampering Multinational Enterprises (MNEs)’s operations, upsetting corporate forecasts and business plans. Global economic turmoil will, in many cases, lead to group-wide losses for entities throughout the value chains of MNEs. This unprecedented situation has warranted a revision in pricing policies while dealings within MNE groups, and in turn impacting re-allocation of profits amongst various countries where global MNEs have footprints.

India is home to multiple Information Technology – IT enabled Service (IT-ITeS) companies, ranging from MNEs’ captive service units to entrepreneurial & high-end IT development companies. Disruption due to COVID-19 is likely to leave most companies with lower margins / losses and plethora of business issues to grapple with. Continued need for work from home impacting efficiency, decline in global economic activity and reduced customer orders have added to the margin pressure, leading to uncertainty on transfer pricing.

Given widespread impact of pandemic resulting in changes to operations/assumptions, there is a need for revision of Advance Pricing Agreements (APAs). The current situation aggravates conditions for business-as-usual operations, which is one of the normal critical assumptions based on which APA is entered into. Hence, it has led to a change in the critical assumptions or a deviation therefrom, and by consequence, require revision in APAs.

Further, Safe Harbour Rules (SHR) notified by CBDT in 2017 were applicable till financial year 2018-19 (i.e., assessment year 2019-20). In this regard, NASSCOM in its Pre-Budget Memorandum submitted to Ministry of Finance in December 2019, had requested the Government to extend applicability of SHRs for another 5 years with certain revisions to provide certainty to taxpayers.

Recommendation:

In order to enable revision of APAs in a consistent manner, we have requested CBDT to issue Circular providing detailed guidance on the subject which includes eligibility, timing and process for making such requests.

We have also requested CBDT to notify revised SHR for FY 2020-21 with rationalized, substantially lower mark-ups specifically with regard to service providers, based on current year’s trend. This will help MNEs to opt for the scheme and thereby avoid transfer pricing disputes that may arise in the current scenario.

These measures will help in avoiding genuine hardship faced by taxpayers and re-instilling confidence in the tax administration in such unprecedented times.

We shall keep you posted on further developments in this regard.

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Tejasvi

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