Revised Safe Harbour Rules notifies “Low Value-adding intra-group services” – No transfer pricing documentation up to INR 10 crores
Globally service-oriented transactions account for more than 60% share in international trade. Service often classified as intangible in nature, is hard to evaluate and measure from a transaction perspective. This means, intangible benefits enjoyed by the service recipient often go unnoticed and the transfer pricing compliance and burden involved could be a challenge in many circumstances. This challenge could be from a perspective of the taxpayer as well as from the point of view of tax authorities. Therefore, there was a need felt globally to resolve such a challenge to ease off pressure from the taxpayer and tax authorities for evaluation of service transactions. Consequently, it is worthwhile to focus on high value intra corporate transactions rather than accounting for every minute penny in the group transaction. Such an approach to simplicity was considered by the OECD while addressing the 15 BEPS action points, with specific reference to transfer pricing implementation models which forms a part of Action 8-10 of the BEPS Action Plans.
The OECD and G20 felt the need to simplify transfer pricing rules in respect of low value-adding intra-group services to safeguard payments such as management fees and head office expenses that have been subject to base erosion in the service recipient country. Low value-adding services refer to the support services which are not part of the core business of the MNE group. To reduce the overall transfer pricing compliance of intra-group services, few categories subject to a threshold were considered for a simplified approach for transfer pricing analysis. Such category was then defined in Chapter VII of the Transfer Pricing Guidelines under OECD BEPS Action 10 as ‘low value-adding intra-group services’.
Amended Safe Harbour rules: CBDT vide Notification 46 dated 7 June 2017, recently amended Indian safe harbour rules in transfer pricing for international transactions, and has notified the rules on the lines of the guidance laid out by OECD and G20 BEPS Action points. To optimise the wide net of transfer pricing issues involved in intra-group services, a new category of international transaction called ‘low value-adding intra-group services’ from a cost perspective for Indian company has been included in the notified rules. According to the new category, a service provider (foreign AE) shall apply a mark-up to the costs separately identified in providing the low value-added services to service recipients of an MNE group. This mark-up should command a limited profit mark-up, not exceeding 5%. However, in a bid to reduce taxpayer’s transfer pricing documentation, the mark-up does not need to be justified by a benchmarking study.
The amended rules notify that the low value-added intra-group services shall be subject to a threshold limit of INR 10 crore.
However, it is to be noted that although no documentation needs to be maintained for the mark up charged by the foreign AE, the cost base of the foreign AE allocated to the Indian operations would need to be justified. Such justification includes a certificate from an Accountant regarding the method of cost pooling, exclusion of shareholder costs and duplicate costs from the cost pool and the reasonableness of the allocation keys used for allocation keys used for allocation of costs to the assessee by the foreign AE.
Considering the above, it is pertinent to note the definition of Accountant in this case. As the books of the foreign AE would need certification on the above basis, an Indian Practicing Chartered Accountant has been given the responsibility to certify. An accountant can also mean any person recognised for undertaking cost certification by the government of the country where the foreign AE is registered or incorporated, subject to stringent conditions which are namely:
(I) if he is a member or partner in any entity engaged in rendering accountancy or valuation services then,—
- the entity or its affiliates have presence in more than two countries; and
- the annual receipt of the entity in the year preceding the year in which cost certification is undertaken exceeds ten crore rupees;
(II) if he is pursuing the profession of accountancy individually or is a valuer then,—
- his annual receipt in the year preceding the year in which cost certification is undertaken, from the exercise of profession, exceeds one crore rupees; and
- he has professional experience of not less than ten years.”
Considering the above, there is now a choice given for documentation maintenance, either to go for an Indian Chartered Accountant or a fairly large Multinational Accountancy Firm for certification of the costs. One may have to look at a cost benefit analysis while a call is taken to engage a professional firm for certifying such cost analysis for documentation purpose. For an MNE it should not happen that the cost of certifying the cost base is higher than maintenance of normal transfer pricing documentation, as this will defeat the purpose of certification and simplification.
The amended safe harbour rules of India have been prepared on the lines of the ‘elective, simplified approach’ adopted by OECD BEPS Action 10, where low value-adding intra-group services have also been discussed. As per the notified rules, low value-adding intra-group services means services that are performed by one or more members of a multinational enterprise group on behalf of one or more other members of the same multinational group and which,
- are in nature of support services
- are not part of the core business of the MNE group (neither a profit centre nor contributing to economically significant activities)
- are not in nature of shareholder services or duplicate services
- neither require use of unique and valuable intangibles nor lead to creation of unique and valuable intangibles;
- do not involve assumption or control of significant risk by service provider or do not create significant risk to service provider; and
- do not have reliable external comparable services that can be used for determining their arm’s length price, but do not include:
- R&D services
- Manufacturing and production services
- IT (software development) services
- KPO services
- BPO services
- Purchasing activities of raw materials or other materials used in manufacturing or production process
- Sales, marketing and distribution activities
- Financial transactions
- Extraction, exploration, or processing of natural resources; and
- Insurance and reinsurance.
As per BEPS Action 10, the following activities could be considered as illustration for low value-adding intra-group services performed by one member of MNE group on behalf of another group member;
- Accounting and auditing services;
- Processing of accounts payable and management of accounts receivable;
- Human resource activities including staffing and recruitments, training, payroll processing, employee welfare etc.;
- Monitoring and compilation of data relating to health, safety, environmental and other standard regulating the business;
- Information technology services where it is not the principal activity of the MNE group i.e. back office IT operations of support and updating;
- Internal and external communications and public relations;
- Legal services and corporate secretarial services; and
- Activities relating to tax obligations, litigations, representations, compliances.
The principle in evaluating the arm’s length price for Intra-group services is to find out if a service in essence is provided, and the service recipient has benefited out of such service. Such a principle is called as ‘benefit test’. In case of a low value adding intra group service, such benefit test could be difficult to apply and implement, due to the embedded nature of the non-core service. In such circumstances, tax administrations should be judgmental and refrain from challenging or reviewing the benefits accruing to the service recipient entity, as that might add complexity.
Following documentation are recommended to be maintained by the MNE Group for the application of simplified approach in low value-adding intra-group services –
- Description of the categories of low value-adding intra-group services provided
- List of beneficiaries
- Reason for justifying each category of service as low value adding service
- Business rational behind provision of such service
- Expected benefits out of such service provision
- Description of selected allocation keys
- Any contracts and agreements
- Calculation of cost pool and the mark-up to be applied etc.