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Latest Asia Pacific transfer pricing developments
Long-awaited Indian ruling addresses marketing intangibles
India’s Special Bench of Income-Tax Appellate Tribunal recently issued a much anticipated ruling on transfer pricing aspects of marketing intangibles in Ms. L.G. Electronics India Private Limited v Assistant Commissioner of Income Tax.
The issue was whether a taxpayer should be compensated for promotional efforts that enhance the value of a trademark or brand name legally owned by an offshore related party. The case was an extension of the “bright-line test” for marketing intangibles established in a controversial US case. The bright line test looks at the average advertising and promotional spend of comparable companies, with any expenditure above this potentially treated as either non-deductible or as creating a local marketing intangible.
In this case, the Indian tax authority went one step further, claiming that by over-investing in advertising and marketing, the local distributor was providing a service to the foreign IP owner of enhancing the IP owner’s marketing intangibles. The tax authority argued that the local distributor should therefore earn a mark-up on its advertising and marketing costs incurred in providing this “service”. The fact that the taxpayer was already earning net margins higher than other comparable companies did not persuade the Special Bench.
The Special Bench largely upheld this approach, but said that the test could not be applied in isolation. Factors such as whether new products are being launched, whether the foreign brand itself is new to the market and whether a royalty is paid by the local distributor should also be taken into account.
Transfer pricing for marketing intangibles has been focus area in India for several years. This decision adds to the growing divergence in transfer pricing practices between India and many other countries.
Businesses that compete on the strength of their brand and those looking to enter new markets in Asia need to consider these issues in determining local transfer pricing policies.
Further transfer pricing law changes for Australia
The Australian “Tranche 2” transfer pricing law reforms have been introduced in a Bill into Parliament. This same Bill also includes amendments to Australia’s general anti-avoidance provision.
The new law includes broader and timelier transfer pricing documentation requirements and increases the risk of transfer pricing adjustments for companies involved in intra-group financing, business restructuring or who have low levels of profitability.
The essence of the law change is that a Public Officer, who signs the tax return, will have to confirm that the actual conditions of the transactions are in line with the arm’s length conditions. This gives the Australian Taxation Office much wider powers to reconstruct a transaction to meet arm’s length conditions and make a transfer pricing adjustment if the taxpayer has received a transfer pricing benefit.
Transfer pricing regulations issued in the Philippines
The Philippines have recently released new OECD-based transfer pricing regulations covering both domestic and international transactions. The regulations are now effective and require taxpayers to maintain contemporaneous transfer pricing documentation. The regulations don’t require transfer pricing documentation to be filed with tax returns, but documentation must be retained and submitted to the tax authority on request.
At this stage, there are no safe harbours and no specific guidance on advance pricing agreements or mutual agreement procedures. Separate guidelines covering APAs and MAPs will be issued in due course.
If you would like to understand more about regional transfer pricing issues or how transfer pricing can support your regional marketing strategy, please contact our transfer pricing team:
Partner – Transfer Pricing
Tel: +64 9 300 7085
Executive Director– Transfer Pricing
Tel: +64 9 300 8022