The Hindu Business Line : Transfer pricing presents substantial tax planning opportunities

Transfer pricing policy no longer follows the `support, file and see' mentality — a more proactive approach is being adopted to managing transfer pricing risk. MR SHIV MAHALINGHAM, HEAD OF TRANSFER PRICING AT CHILTERN PLC, LONDON.

MR SHIV MAHALINGHAM, Head of Transfer Pricing at Chiltern Plc, London.

Chiltern Plc is a London-based company that advises clients on international taxation. "At Chiltern we make it a point of being different. Not for the sake of it but because that is what our clients want. We're large enough to offer the very best advice and support, but we're independent, and small enough, to offer a genuinely personal service," declares www.chilternplc.com, the company's site. Chiltern is a member of Taxand, `the first independent global tax alliance of independent and specialist tax firms (now including more than 1,500 tax professionals with firms in 33 countries)'.

As the Head of Transfer Pricing at Chiltern, Shiv Mahalingham, is definitely different. Before embarking on a career in transfer pricing, he played three seasons of basketball in the Southern Conference of the English Basketball League, as one learns from his bio. "Shiv has previously worked in the Big 4, predominantly advising large multinational companies in relation to transfer pricing and value chain optimisation.

He regularly publishes articles in the international trade press and, at the age of 26, was accepted as one of the youngest fellows in the history of the UK's Chartered Institute of Taxation on submission of his thesis on modernising UK tax legislation whilst maintaining the competitiveness of the UK economy." Here is Shiv, taking on a few questions from Business Line.

What have been the major developments in the TP field, globally, in the last couple of years?

There have been two major developments in global transfer pricing in recent years:

Tax competition and the desire of the revenue authorities to increase tax revenues: Whilst many jurisdictions worldwide have simplified tax systems in an effort to attract business, others are looking to areas such as transfer pricing to increase tax revenues with apparent disregard for any negative impact this may have on foreign investment.

Over 30 jurisdictions now apply transfer pricing legislation, with more introducing regulations every year. In addition to this, jurisdictions with longstanding transfer pricing regulations have incorporated amendments designed to draw in new taxpayers. Transfer pricing is a subjective area of taxation law and this provides an opportunity for revenue authorities to present challenges — global experience shows an increase in the number and intensity of audits creating additional cost for multinational companies (MNCs) in the form of taxation adjustments, interest on underpaid taxation, penalties, professional costs, management time, etc.

Shift in TP policy at the MNCs: Whilst the changed focus of revenue authorities is unwelcome for MNCs, many are finding that transfer pricing presents substantial tax planning opportunities.

Transfer pricing policy no longer follows the `support, file and see' mentality — a more proactive approach is being adopted to managing transfer pricing risk and searching out opportunities for pricing design.

Effective pricing and value chain optimisation present MNCs with significant opportunities for operational cost savings (in addition to taxation arbitrage across borders) and many of the larger MNCs have already signposted the way to success.

The net impact of these developments is that the major players (revenue authorities, MNCs and professional services firms) are devoting significant resource to this area of business.

What have been the perennial problems that multinationals face with regard to Indian TP law? And how can these be resolved?

The primary problems faced by MNCs with regard to transfer pricing stem from having to navigate through unfamiliar legislation. The Indian transfer pricing regulations are comprehensive and it is important that firms engaging in material inter-company transactions apply resource to assessing transfer pricing risks and opportunities. This can be achieved by engaging professional firms with transfer pricing specialists or even employing specialist staff in-house.

Unfortunately, the transfer pricing regulations do not convey a process for negotiating advance pricing agreements (APAs) with the Indian revenue authorities — global experience of APAs is that they can function effectively to provide certainty to taxpayers.

On the irritants in TP law in other countries — a few examples.

It is argued by many that the US gave transfer pricing legislation to the world and high-profile cases in the US continue to shape global debate. The recent GSK settlement was heralded by the IRS[1] to be the largest tax settlement in its history and this provides an indication of the potential cost of a transfer pricing audit (note that the magnitude of the settlement should be put into context in that it was in relation to a number of years of transfer pricing adjustments — nonetheless, GSK agreed to make a $3.4 billion payment to the IRS). The resolve of revenue authorities (not just the IRS but revenue authorities in other jurisdictions) is likely to have been strengthened by this large settlement and this may translate into a significant increase in transfer pricing audits worldwide.

How has been the application of TP to the services sector (such as information technology) across the world? Any best practices you'd like to mention.

The OECD transfer pricing committee continues to set the standard and work undertaken in the services area has been first rate — a raft of initiatives are under way to address transfer pricing in the rapidly developing services sectors.

With respect to best practice, it is crucial to locate transfer pricing specialists with excellent industry knowledge and with experience in negotiating with revenue authorities. Experience shows that practical advice which analyses the degree of risk before embarking on transfer pricing engagements will save MNCs unnecessary fees.

On the developments that you foresee in TP laws.

I would expect to see the following over the next few years:

A continuing increase in the number of jurisdictions applying transfer pricing legislation;

Continued expansion of the in-house taxation departments of MNCs to include transfer pricing specialists; and

The introduction of OECD guidance for funding structures, and thin capitalisation.

Lastly, lessons from basketball for the tax consultant.

I appreciate that you don't find many ex-professional basketball players in the taxation world, and my `crossover' lessons are as follows:

Maintain a peripherally aware offence.

Always look for opportunities to maximise value through transfer pricing design and value chain optimisation.

Defence — don't ignore the fundamentals.

Make sure that you retain adequate support for your pricing structures and ensure that systems are in place to identify and manage risk.

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