MNCS face transfer pricing worries as tax deadline nears

Multinationals with transactions between group entities have less than three weeks to account for such deals by extrapolating information from the first three quarters of the year and other approximations.

The pandemic is said to have caused valuation uncertainty, which could open the door to tax disputes.

They would be looking to wrap up the process by March 15, which is the deadline for corporate entities to pay advance tax, according to experts.

Pricing transfers of goods and services between related entities is called transfer pricing. Since companies can use such transfers to lower the taxes they pay, for example, by transferring profits from high-tax jurisdictions to lowtax jurisdictions, transactions have to be valued impartially.

Companies depend on industry data and past trends to typically make such valuations so that they don’t face tax issues. The pandemic year has made this difficult.

“... conventional approaches of using prior year data would not be typically applicable, as the 2020 year stands out as being exceptionally circumstantial relative to the previous years, and hence not comparable,” said Sanjay Kumar, partner, Deloitte India.

The margins that typically applied to such transactions may well have changed.

“Whether to retain the existing target margins or to revise them will depend on the extent of impact on a company, its group as a whole, and the industry in which it operates. Also, in performing the comparability analysis, some of the historical methods and filters applied may require a careful rethink,” said Hitesh D Gajaria, senior partner, KPMG India.

Companies are working on models based on quarterly financials published by unrelated companies for the first three quarters of the financial year 2020-21 to estimate the trend in margins and the impact of the pandemic, said Vijay Iyer, national leader of the transfer pricing group at EY India.

Some are waiting for another 10-15 days to collect any additional information that may help to make estimates for the full year. The annual data would have provided the quantitative impact of the pandemic but comparable companies would publish such audited data only after the year ends.

“As of now we don’t have access to that,” said Iyer.

He said companies had till September 2021 to file their documentation with the Registrar of Companies. It could be another quarter or so before it is publicly available. This means that accurate industry data for the pandemic year would potentially only be available by January 2022. There could be a shortfall in taxes paid if these industry numbers turn out to be different than expected.

Companies would have to face interest on any shortfall in advance taxes they paid based on earlier estimates.

“...when the tax department undertakes ... scrutiny for this year, they will have the advantage of hindsight (often referred to as ex-post data), which might lead to a paradoxical situation wherein there are greater disputes for the most distressed year of the century,” said Deloitte’s Kumar.

Companies would also have to keep in mind the disclosures they’ve made to the customs department while making adjustments in prices for transfer-pricing compliance, said KPMG’S Gajaria. They need to make sure that any adjustments are in compliance with foreign exchange regulations, he said.

Sectors like travel, tourism, hospitality, education, and commercial real estate are some of the sectors where uncertainty is expected to continue in 2021 as well.