BackMNCs tread carefully on intra-firm sale of shares
Firms seek to negotiate with government on prices before agreeing on share transactions between an overseas company and its local unit
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New Delhi: To avoid being slapped with tax notices, multinational firms running businesses in India are now seeking to negotiate with the government on prices before agreeing on share transactions between an overseas company and its local unit.
Funding a subsidiary by issuing shares is common practice among multinational companies, which they typically view as a capital transaction. The income-tax department does not seem to agree.
In the financial year ended March, the department issued notices to 26 companies, which include Shell India Pvt. Ltd, HSBC Securities and Capital Markets (India) Pvt. Ltd and Standard Chartered Securities (India) Ltd, for selling intra-company shares at cut prices, thus inviting scrutiny under transfer-pricing norms.
Transfer pricing refers to the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged for an unrelated party—is levied.
To avoid such disputes that some companies such as Shell and Vodafone India are contesting in court, many firms are taking recourse to advance pricing agreements (APA) to cover similar transactions.
“We have received APA applications involving share transactions between a parent and subsidiary," said a finance ministry official, who did not provide any details of such agreements or the names of the companies that have applied.
An APA is an agreement between a taxpayer and the tax department on a transfer-pricing procedure for a particular set of transactions detailing the agreed transfer-pricing procedure, arm’s length pricing and details of the transaction under review. The central board of direct taxes received 146 applications for APAs as of 31 March.
APAs were notified in August last year as the government sought to reduce the number of transfer-pricing disputes and provide certainty to investors.
“More and more companies are lining up for APAs to cover such transactions. They are asking the tax department to tell them what the value of the share should be to avoid future controversies," said Vijay Iyer, partner and national leader, transfer pricing, at EY, a consultancy earlier known as Ernst and Young. “The difference (of the valuation arrived by the tax department less the valuation arrived by the company for that share issuance) is first taxed in the company’s hands as income. Also, since the money has not been received from the parent, interest also has to be paid."
Transfer-pricing has been an area of increasing dispute in India with the most recent assessment of such pricing by the tax department seeing increased claims to the tune of $9.5 billion.
Shell India Pvt. Ltd, the Indian arm of Royal Dutch Shell Plc., was accused by the income-tax department earlier this year of underpricing an issue of 870 million shares to an overseas group entity called Shell Gas BV in March 2009. The shares, which were issued at ₹ 10 each, was valued by the department at ₹ 180 per share, leading to an addition to taxable income by ₹ 15,000 crore
In Vodafone’s case, the transaction between an Indian and a subsidiary in Mauritius was said to be underpriced by ₹ 1,300 crore.
“There is a point of difference between the companies and the income-tax department on the taxability of such transactions," the finance ministry official said, requesting anonymity. “But the matter is now being debated in the courts. It may not be correct to comment on the legal aspects at present since the case is sub-judice."
An APA is a good tool to gain certainty, according to S.P. Singh, senior director at Deloitte Haskins and Sells, an advisory firm.
“However, both the tax department and the taxpayer are waiting for the decision of the Bombay high court," Singh said.
“It remains to be seen if the court decides to go into the merits of the case."
The disputes involving Shell, Vodafone and the income-tax department are being heard at the Bombay high court.
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