India's Budget 2009 – Viewed from US
New Transfer Pricing Rules, Speedy Tax Dispute Resolution Welcome Change But Companies May Need To Revisit Current Agreements:
India's proposed Safe Harbour rules for transfer pricing could allow income tax authorities to accept the price set by the tax payer, significantly easing transfer pricing hassles for U.S. business but companies may need to review existing agreements, according to Nair & Co., a leading global integrated solutions provider.
Under the new measure proposed in India's 2009 budget, the Central Board of Direct Taxes (CBDT) is being empowered to formulate rules that define the circumstances under which the income tax authorities can accept the transfer price declared by the tax payer. The transfer pricing changes incorporated in the budget propose that the 5% range benefit would be available only if the arm's length price falls within +/-5% range of the transfer price.
This would also mean a review of the benchmarking analysis report to ensure that the arm's length price falls within +/-5% to avoid adjustments by the revenue.
Alternative Dispute Resolution Mechanism (ADRM)
In a related proposal for setting up of the Alternative Dispute Resolution Mechanism (ADRM), the government delivered on hopes that it would use a strong re-election mandate to push through pro-market reforms. The ADRM, aimed at encouraging foreign investments, will ensure fast track resolution of transfer pricing disputes between the tax authorities and foreign companies.
Prolonged litigation over transfer pricing issues is a pain for foreign companies. The new rules could usher in a certain organization and predictability on transfer pricing assessment.
It is very important for a foreign subsidiary to be remunerated by other group companies on an arm's length basis. There is high level of regulatory focus in this area and companies need to be cautious in dealing with transfer pricing issues.
Fringe Benefit Tax
India's 2009 budget also proposes scrapping of the Fringe Benefit Tax (FBT), which could reduce administrative costs and tax burdens for companies but also means that some U.S. firms may need to revisit their subsidiary contracts.
With the abolition of FBT, employees themselves will have to pay taxes on Employee Stock Options Plans (ESOPs) or stock options exercised and other fringe benefits, which include entertainment, gifts etc., instead of the employers paying fringe benefit tax on these benefits.
Companies could be required to amend the Cost Plus Intercompany Agreements of the subsidiaries and may also need to consider amendment of the Stock Option Plan. Companies must also revisit the salary structure of the employees.
Export Profits
In a major boost for the Information Technology and Business Process Outsourcing industry (IT-BPO), India extended to 2010-2011 the tax holiday on export profits for entities eligible under section 10A and Section10B.