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Hema Ramakrishnan
K.R. Srivats

`Two regrettable aspects of the Indian transfer pricing regulations are the broad scope of the definition of associated enterprise and the stipulation that the arithmetic mean should be used in cases where more than one price can be determined by the most appropriate method.'

NEW DELHI, Jan. 28

THE decision taken by revenue authorities to have an advance pricing arrangement for tax assesses only after gaining some experience in administering the transfer pricing regulations is a reasonable approach, according to Dr Richard A. Boykin, Managing Partner, Global Transfer Pricing Services, KPMG.

"Although the advance pricing arrangement mechanism is a good process in settling thorny issues relating to transfer pricing, it is not common for tax jurisdictions to jump into a mechanism without gaining sufficient experience on the enforcement of the regulations,'' Dr Boykin told Business Line here.

A large share of world trade consists of transfers of goods, intangibles and services within MNCs. To determine their tax liability in each jurisdiction, the right price — the arm's length price — has to be put on these transactions.

This will prevent profits from being siphoned off from one jurisdiction to another. To avoid double taxation and its adverse fallout on trade, the Organisation for Economic Cooperation and Development (OECD) has issued guidelines on computation of the arms length price.

Dr Boykin contended that transfer pricing continued to be the single most important international taxation issue for multinationals, although it still does not form part of the board-level discussions.

According to him, the Indian transfer pricing legislation and regulations on transfer pricing are a blend of the OECD and the US models. He held that two regrettable aspects of the Indian transfer pricing regulations are the broad scope of the definition of associated enterprise and the stipulation that the arithmetic mean should be used in cases where more than one price can be determined by the most appropriate method. "Taxpayers are at a disadvantage if the concept of arithmetic mean is applied, given that there cannot always be a single price for any transactions between unrelated parties. An inter-quartile range could be an acceptable solution,'' Dr Boykin said.

He also maintained that the Indian penalty provisions for violating transfer pricing laws were among the "harshest'' he had come across. Under the existing Income-Tax Act 1961, failure to maintain documentation by any person who has entered into an international transaction would attract a penalty equivalent to two per cent of the value of each such transaction.

Dr Boykin favoured a centralised approach to maintenance of documents, particularly in the case of MNCs whose operations span several countries. "Multinational companies should take control of documentation at the headquarters level even if a number of their affiliates are run as strong independent entities.''

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