International Taxation – Documentations & Compliances By Devashish Bharti


WHAT IS INTERNATIONAL TAXATION?

International taxation is the study or determination of tax on a person or business subject to the tax law of different countries or the international aspects of an individual country's tax laws as the case may be.

In simple words, it is a Tax on international transactions which occurs between two persons located in two different tax jurisdiction or the same person having establishments in two or more different countries.

AREA COVERED UNDER INTERNATIONAL TAXATION:

  1. Transfer Pricing
  2. Non – resident Taxation
  3. Double Taxation Relief
  4. Advance Rulings
  5. Black Money and the Imposition of Tax Law
  6. Model Tax Conventions
  7. Tax Treaties
  8. Anti - Avoidance Measures
  9. Taxation of E-Commerce Transactions 

WHAT IS TRANSFER PRICING?

The prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises.

In another Term, Price which is charged between two or more entities of an MNC [associated enterprises (AEs)] operating in different countries.

NECESSITY OF INTERNATIONAL TAXATION PROVISIONS?

Holding Company provides various assistance to its Subsidiary Company. Further, one company can provide assistance in several ways to other company located in a different country if there exist any mutual relationship. In this way, they try to influence the price of Goods & Services and also to shift Tax Burden from one Tax territory (High Rate of Tax) to another Tax territory (Low Rate of Tax). This kind of transaction can also happen within the same country, which is termed “Specified Domestic Transactions”.

For the purpose of Taxation, Tax authority has to determine the actual amount of income earned / expenses incurred by resident assessee on the basis of Arm’s Length Pricing Principle. Further, they have to determine the relationship of the assessee with Associated Enterprises. They also have to determine the International Transaction entered into by the resident assessee with Non-Residents, and Specified Domestic Transaction entered by Taxable entity (assessee) with an Exempted entity or Loss-making entity, to avoid any Revenue Loss to the Government.

MEANING OF FEW TERMS:

Arm’s Length Principle: The Arm’s Length Price is the price that would be paid if the transaction had taken place between two comparable independent and unrelated parties, where the consideration is only commercial.

Associated Enterprises: Associated enterprises are those which are owned or controlled by the same or common entity/person.

Transaction: It includes an arrangement, understanding or action in concert –

(a) Whether or not such arrangement, understanding or action is formal or in writing; or

(b) Whether or not such an arrangement, understanding or action is intended to be enforceable by legal proceeding.

International Transaction: A transaction between two or more associated enterprises, either or both of whom are non-residents; and transaction in the nature of:-

(a) Sale/ purchase/ lease of tangible property; or

(b) Sale/ purchase/ lease of intangible property; or

(c) Provision of services; or

(d) Lending/borrowing money; or

(e) Any other transaction having a bearing on profits, income, losses or assets of such enterprises; or

(f) Mutual agreement or arrangement between two or more associated enterprise for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.

Specified Domestic Transaction: Any transaction referred to in section 80A, or any transfer of goods or services referred to in section 80-IA (8), or any business transacted between the assessee carrying on eligible business and other person as referred to section 80-IA (10); or any transaction referred to in any other section under Chapter VI-A or Section 10AA to which provisions of section 80-IA (8) or section 80-IA (10) are applicable; or any other transaction as may be prescribed (under the Income Tax Act, 1961 or Rules made thereunder).

METHODS TO DETERMINE ARM’S LENGTH PRICE:

(a) Comparable uncontrolled price method;

(b) Resale price method;

(c) Cost plus method;

(d) Profit split method;

(e) Transactional net margin method;

(f) Such other method as may be prescribed by the Board.

Summary of Transfer Pricing Documentation:

 

FUNCTIONS, ASSETS AND RISK (FAR) ANALYSIS:

Functions, Assets and Risk (‘FAR’) analysis is an analysis of the functions performed, taking into account assets used and risks assumed by associated enterprises (AEs) in controlled transactions.

A method of finding and organizing facts about a business in terms of the functions performed, assets used (including intangible property) and risks assumed by such business to identify how they are divided among the AEs; and assess the importance of each function in the overall value chain.

The FAR analysis is the starting point in determining the arm’s length price of an international transaction.

DOCUMENTATIONS AND COMPLIANCES:

Transfer pricing documentation is the documentation maintained to review Transfer Pricing arrangements for transactions taking place between different entities of the same group (also known as intra-group transactions). The primary objective of the transfer pricing documentation is to review the arm’s length (fair price) nature of the transactions taking place between different entities of a Multi National Company.

The Conclusion section of Transfer Pricing documentation captures a high-level summary of the Transfer Pricing documentation, primarily including the transactions involved, most appropriate method and PLI (Profit Level Indicator) used and the results of the benchmarking analysis.

In case the tested party is incurring losses, the justification for the same is included in this section.

PENALTIES:

  • The penalty for failure to furnish information or document under section 92D [Section 271G]: Such person shall be liable to a penalty up to 2% of the value of international transactions or specified domestic transaction.
  • Failure to report any international transaction or any transaction deemed to be an international transaction or specified domestic transaction to which the provisions of Chapter X applies would constitute ‘misreporting of income’ under section 270A(9), in respect of which penalty@200% would be attracted.
  • The penalty for failure to report any international transaction or any transaction deemed to be an international transaction or specified domestic transaction: Under section 270A, penalty@50% of tax payable on under-reported income is leviable.
  • The penalty for failure to keep and maintain information and documentation [Section 271AA]: The Assessing Officer or Commissioner (Appeals) may direct the person entering into an international transaction to pay a penalty@2% of the value of the international transaction entered into by him.
  • The penalty for failure to furnish report under section 92E (Section 271BA): If any person fails to furnish a report from an accountant, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of Rs. 1 lakh.

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