India is the third highest jurisdiction with pending transfer pricing disputes, as per Ernst & Young Survey
- 1,500 transfer pricing disputes were pending in litigation, as of February 2011
- This number has more than doubled in the last 18 months.
- Ernst & Young recommends Advance Pricing Agreements (APAs) as the most favourable tool for transfer pricing adjustments
New Delhi, 20 August 2012: Ernst & Young Global Transfer Pricing Survey, 2012 provides the insights of tax authorities in a wide range of transfer pricing jurisdictions and suggests that in India atleast 1,500 transfer pricing disputes were pending in litigation, as of February 2011. This number has more than doubled in the last 18 months. Whereas, in United States this number is less than six and in countries like New Zealand, Taiwan and Singapore, there are neither any ongoing nor any pending cases for domestic appeal. Based on the current caseload of transfer pricing reviews, the top five jurisdictions (in order) are Japan, Canada, India, Germany and the United Kingdom.
According to the report, the taxpayers in India find themselves in the challenging position of documenting and defending their transfer prices as controversy is on the rise, since increasingly well-staffed tax authorities apply more sophisticated and sweeping transfer pricing tools. The report suggests that companies should pursue tax certainty and evaluate Advance Pricing Agreements (APAs) more than ever, to better manage the growing geographic footprint of transfer pricing requirements, as well as the additional risk of adjustments and penalties. APA is an agreement between the taxpayer and tax authority to determine in advance, a set of criteria that would govern the transfer prices for covered inter-company transactions for a fixed period of time.
Commenting on APA as a favourable tool, Vijay Iyer, Partner & Transfer Pricing Leader, Ernst & Young, said, “As per the Directorate of Transfer Pricing, there is a mispricing of Rs. 67,768 crore in 2010-11 and Rs. 43,531 crore in 2011-12. In such a scenario, APAs will help in offering taxpayers an opportunity to resolve their transfer pricing issues with the tax authority in a cooperative and mutually beneficial manner and provide certainty on this aspect. APAs have been successfully implemented in a number of countries across the world and provide significant benefits to the tax administration and the taxpayer.”
As per the findings, the number of jurisdictions that have introduced APAs to give transfer pricing certainty continues to expand. Some countries are reporting much swifter resolution, particularly for unilateral APAs, for example Netherlands showed a predominance of unilateral APAs with a 55-day processing time. The Slovak Republic had an average completion time of two to three months, Austria required three to six months, New Zealand two to six months, and Hungary four months for unilateral APAs. However, in some major territories, processing times remain long, with US and Canada are among the slowest, at nearly three years and four years for bilateral APAs, respectively. Switzerland also reports an average processing time of two to three years for bilateral APAs.
Additionally, the report suggests Mutual agreement procedure (MAP) as another predominant mean of resolving transfer pricing disputes, and nearly all jurisdictions report that MAP claims are ultimately resolved without double taxation. Also, litigation and arbitration remain exceptional means of resolving transfer pricing disputes. Only Argentina, Brazil, India, Sweden and Venezuela reported a significant use of litigation to resolve transfer pricing disputes, and only France reported a significant of arbitration procedures.
The Ernst & Young Survey recommends that taxpayers should recognise that they need more resources with increased geographic reach and some non-traditional skills. For example, experience with bargaining theory would help to deal with what the Organisation for Economic Co-operation and Development (OECD) calls “options realistically available”.
About the Report:
Ernst & Young Transfer Pricing survey, 2012 global transfer pricing tax authority survey: Perspectives, interpretations and regulatory change, provides the insights of tax authorities in a wide range of transfer pricing jurisdictions and gives practical suggestions on how organizations can deal with transfer pricing issues in the 48 countries covered.
Since the first edition of this survey in 1995, we have seen a remarkable increase in the number of countries introducing transfer pricing laws. We have also seen the spread of transfer pricing rules from the developed markets of North America, Western Europe and Australia to the developing markets of Africa, Asia and Eastern Europe.
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