05 Sep
What is the cost-plus method to assess the transfer price
The cost-plus method is a very traditional method and easy to understand. Generally, this method is applicable where it involves the transfer of semi-finished products to the related party, where joint facility agreements have been concluded, or where the controlled transaction is the provision of services
There are three traditional transaction methods to ascertain the transfer price, two of which we have already discussed in detail. The cost-plus method is the third one that we have covered in this article.
As the name suggests, the transfer price under the cost-plus method is the cost plus a comparable markup based on the functions performed and risk involved, and the same has been defined in the transfer pricing guidelines issued by the Organisation for Economic Cooperation and Development (OECD) as follows:
“A transfer pricing method using the costs incurred by the supplier of property (or services) in a controlled transaction. An appropriate cost plus markup is added to this cost, to make an appropriate profit in light of the functions performed (taking into account assets used and risks assumed) and the market conditions. What is arrived at after adding the cost plus mark up to the above costs may be regarded as an arm’s length price of the original controlled transaction”.
Under this method, the actual cost involved in the controlled transaction is calculated. The cost can be direct and indirect costs related to the transaction. Direct cost is the cost that is incurred specifically for producing a product or rendering service, such as the cost of raw materials, and this cost can be directly traced to the related product and service. While indirect cost is a common cost like the costs of a repair department that services equipment used to produce different products, and this cost is allocated to the respective product and service by applying various methods like high low method.
An appropriate markup is added to the above-calculated cost based on the functions performed, risk involved, and market conditions involved. A comparable markup should be added to the comparable cost basis. Like, if one supplier conducts business with the leased assets, its cost base would be different from the supplier who conducts its business through the owned assets, and this factor should be considered while adding the mark up.
The cost plus markup of the supplier in the controlled transaction should be compared with the cost plus markup of the same supplier in the uncontrolled transactions (internal comparable). This means the cost plus markup earned by the supplier from the related party should be compared with the cost plus markup earned from any unrelated party. If there are any differences, an adjustment should be made.
In addition, the cost plus markup that would have been earned in comparable transactions by an independent enterprise may serve as a guide (external comparable). External comparable is the cost plus markup that have been or would have been earned by the external supplier who is in the same business-like an internal supplier and selling the same goods and services under the same terms and conditions to any third party.
While comparing with cost plus markup of the uncontrolled transaction, if there are no differences, then the existing cost plus mark up should be considered an arm’s length price. However, if the material differences have been identified, then a reasonable adjustment should be made to eliminate the material effects of such differences. So, we can say that “transfer price under the cost-plus method = external/Internal comparable + adjustment (if any)”.
We should not ignore the level and type of expenses – operating expenses and non-operating expenses. If there are higher expenses due to more assets and risk involved, then an adjustment should be made. If more expenses are due to additional functions that bring efficiency, then compensation should be given. If due to the inefficiencies, there are higher expenses like supervisory, general, administrative expenses etc., then no adjustment should be made to the margin.
While calculating the cost, we should not ignore the accounting consistency. If the accounting treatment in a controlled transaction is different from the accounting treatment in an uncontrolled transaction, appropriate adjustments should be made to the data used to ensure that the same type of costs is used in each case to ensure consistency.
The cost-plus method is a very traditional method and easy to understand. Generally, this method is applicable where it involves the transfer of semi-finished products to the related party, where joint facility agreements have been concluded, or where the controlled transaction is the provision of services.
The biggest challenge in this method is to get the mark up from the other party, which is not easily available. Moreover, keeping in view the functions performed and the risk involved, the adjustment on account of transactional differences would not be an easy job.
Source:https://www.khaleejtimes.com/finance/what-is-the-cost-plus-method-to-assess-the-transfer-price
01 Sep
GCC could fast-track its sustainability goals with data driven ESG reporting
A systematic data-driven framework can help organizations in the GCC to reduce waste
Sustainability reporting can enable organizations in the middle east to reduce risk across their supply chains by improving their decision-making processes. Protiviti Member Firm for the Middle East Region has emphasized on the importance of data driven environmental, social, and governance (ESG) reporting to fast-track the region’s sustainability goals. The leading consulting firm in the region stated that a systematic data-driven framework will be equipped to help organizations in the GCC to reduce waste and also yield significant cost savings in the near future.
Furthermore, the two major global meetings, namely United Nations Climate Change Conference 2022 (COP27) in Egypt and COP28 in UAE, will place environment, social, and governance challenges high on the region’s agenda.
“Countries in the GCC currently have either implemented or are in the process of transitioning towards improved sustainability disclosure. Sustainability presents multi-dimensional and complex challenges, with varying levels of understanding across industries and organizations,” says Arindam De, Deputy CEO and Managing Director, Protiviti Member Firm for the Middle East Region.
“At Protiviti, we work closely with the industry stakeholders to effectively evaluate what ESG means for an organization, helping build, implement, execute, monitor, and report on ESG objectives that will evolve and grow with the organization. We help organizations in the GCC to understand the bigger picture, and to clearly identify where they can make a larger impact on society and the environment while maximizing performance”.
ESG reporting is garnering growing attention today, particularly among the decision makers within the public and private sectors seeking to understand and possibly comply with specific requirements in their country or their industry.
“However, when it comes to ESG reporting, there are several questions that need solid responses. Questions such as who is specifically required to issue these ESG reports or who is issuing them voluntarily and more importantly, what do organizations need in order to issue them in terms of data and operational processes are some of the prominent ones that need immediate attention,” says De.
A well-defined structure of sustainability reporting can enable organizations in GCC to measure and monitor performance against established economic, environmental, social, and governance goals. Furthermore, transparency leads to improved decision-making, more effective communication with external stakeholders, and enhanced ESG health of an organization.
“ESG reporting is not a marketing campaign but as important as the mandatory financial reporting with proper accountability. It has to be completely data-driven, only then can organizations evaluate, monitor, and achieve the progress made towards their sustainability goals. It is also important for the organisation’s internal stakeholders to comprehend the importance of ESG reporting and only then can an organization as a consolidated unit – move forward,” adds De.
“At a recent webinar conducted by Protiviti earlier this year, out of 300 plus global attendees, we observed that close to 44% of them have not started deploying a framework to capture data through IoT (Internet-of-Things), 37% of the respondents were not aware of an ESG report being published by their organization, only 36% have the primary responsibility of ESG reporting and assigned to an ESG Committee and 34% respondents stated that they are planning to increase budget in all areas of ESG. So, there is a lot of ground that organizations across the Middle East region and globally need to cover to reach closer to their sustainability goals,” explains De.
“Sustainability continues to evolve as companies recognize the value of supporting ESG issues to survive in the marketplace. Sustainability defines an organization, setting it apart from its competitors while impacting the whole organization in varying ways and intensities. However, while many companies are aware they must act, they find it difficult to strategically tackle the issue,” De says.
Source:https://gulfnews.com/business/corporate-news/gcc-could-fast-track-its-sustainability-goals-with-data-driven-esg-reporting-1.1661847047039
21 Aug
New Indian income tax rule: PAN card now mandatory for certain cash deposits, withdrawals
Dubai: After the Indian government amended cash limit rules earlier this year, it also made PAN or Aadhaar number mandatory for certain cash deposits and withdrawals. But does this apply to NRIs?
India’s Central Board of Direct Taxes (CBDT) issued a notification that cash deposits and withdrawals in a financial year of over Rs2 million (Dh93,041) when opening of current account or cash credit account with a bank, requires all Indians to furnish PAN or Aadhaar.
(A Permanent Account Number or PAN card, issued by the Indian Income Tax Department, and an Aadhar, a government-issued 12 digit identification number, are two ID documents assigned to each Indian citizen who either resides or looks to reside in India, while transacting amounts in Indian rupees.)
What does the statement mean and what has changed?
As per the notification, ‘every person, at the time of entering into a transaction [must] quote his permanent account number (PAN) or Aadhaar number and every person, who receives such documents, shall ensure that the said number has been duly quoted and authenticated’.
What this means is that prior to this government alert, your bank was already required to ensure that such transactions have PAN. But now your bank will be required to keep the PAN in the bank’s records and inform the same to the Income tax department regarding such financial transactions.
Earlier, as per income tax norms, PAN was mandatorily required in case of cash deposit exceeding Rs50,000 (Dh2,325) in a single day, but no annual aggregate limit for cash deposits was given before. While there was no limit for cash withdrawal, which has been prescribed now.
What if one does not furnish or have PAN? Are there fines?
The notification specifies how ‘every person’ making a cash deposit and withdrawal aggregating to Rs2 million (Dh93,041) or more in the financial year in one or more bank accounts are to reveal their PAN.
If not, he or she would not be able to perform such transactions. Paying or receiving cash above the limits set is also punishable by a steep penalty of up to 100 per cent of the amount paid or received.
Individuals who do not have a PAN need to apply for a PAN at least seven days before entering any transaction of above Rs50,000 (Dh2,325) a day or above Rs2 million (Dh93,041) a financial year.
Why did the changes come into effect? Are there more changes?
The Income Tax department, along with other central government departments, has been updating and amending rules to reduce the risk of financial fraud, illicit money transactions and other money crimes over the past few years, and tax experts suggest this move in line with this.
“The government also monitors receiving cash worth more than Rs200,000 (Dh9,303) to restrict the use of cash in high-value transactions. So, a person cannot accept more than Rs200,000 (Dh9,303) in cash, not even from close family,” said an independent tax consultant Brijesh Meti based in India.
Since the rules are applicable since May 26, experts also opine how authorities may need to clarify whether the transactions are undertaken prior to May 26, shall be considered for computing the aggregate value of Rs2 million (Dh93,041) for this financial year or not.
Does this apply to Non-Resident Indian (NRI) transactions?
While PAN may be required, this rule doesn’t apply to NRIs when it comes to having Aadhar, clarified Dixit Jain, Managing Director at The Tax Experts DMCC.
“It is not mandatory for NRIs, as NRIs are not mandatorily required to have an Aadhar card, even though they can easily apply for one when they come to India,” Dixit Jain added. “However, PAN may be required.”
In other words, more than this rule change impacting NRIs who would have already added PAN details to their bank accounts, as initially required by banks, it is aimed at getting banks to keep the PAN on record, and not seek PAN with each transaction, and officially declare any withdrawals over Rs2 million.
“India’s income tax laws prohibit cash transactions above Rs200,000 (Dh9,303), which is also the limit when accepting donations from a single person on a single occasion,” Meti added. “Those who accept hard cash over this amount violating this clause may face a penalty equivalent to the amount received.”
“In a property transaction, the maximum hard cash allowed is also Rs20,000 (about Dh1,000). The limit remains the same even if a property seller accepts an advance.”
Source:https://gulfnews.com/your-money/taxation/new-indian-income-tax-rule-pan-card-now-mandatory-for-certain-cash-deposits-withdrawals-1.1660917543823
01 Aug
Large groups can set up a tax group to minimise their compliance cost
As required by International Financial Reporting Standards (IFRS), groups are required to prepare consolidated financial statements where inter companies’ transactions are eliminated, and losses of one entity are adjusted against the profits of the other entities
Large businesses are structured as a group for better management and reporting purposes. Moreover, companies wanted to enjoy the tax benefits and reliefs which are generally available to the groups, so this is another reason that large businesses are organized in the form of groups. Tax planning and minimising the compliance cost are other critical factors for which large entities assemble themselves as a group.
As required by International Financial Reporting Standards (IFRS), groups are required to prepare consolidated financial statements where inter companies’ transactions are eliminated, and losses of one entity are adjusted against the profits of the other entities. The net profits of the groups are adjusted to arrive at the taxable profits of the group.
Keeping in view the above factors, tax grouping has been proposed in the Corporate Tax Public Consultation Document, which suggests that eligible businesses would be able to create the tax groups and transfer their losses between group companies that are seventy-five per cent or more commonly owned.
It has been proposed in the document that the group of companies which are residents of the UAE and whose ninety-five per cent shares and voting rights are held by the parent company can form a tax group. In addition, a subsidiary can also be part of the tax group if it is owned indirectly by the parent company and other subsidiaries own at least ninety-five per cent of its shares. The branch of a parent company or group subsidiary company can also be a part of the tax group.
To form a tax group, it is compulsory that neither the parent company nor any of the subsidiaries can be an exempt person or a free zone person that benefits from the zero per cent corporate rate, and all group members must use the same financial year.
Based on the above-proposed requirements, the following businesses cannot be part of the tax group:
• Non-resident companies
• Companies which are in the free zones and enjoying zero per cent corporate tax
• Entities in which the parent company or other group companies are not holding at least ninety-five per cent shares and voting rights.
• The companies which have different financial years.
The group will be formed with the mutual consent of all entities, and the entities that want to be part of the tax group will submit a notice signed by all relevant entities to the Federal Tax Authority (FTA). The FTA will review the application and, upon satisfaction of the criteria, will process the application by issuing one tax number to the tax group.
The tax group will be considered a single entity for corporate tax purposes, and the parent entity will be liable to prepare consolidated financial statements. While consolidating the financials, the transactions between the group entities will be eliminated, and the losses of one entity will be adjusted against the profits of other group entities/entities.
The group entities that do not meet ninety-five per cent ownership criteria or the entities that meet the criteria but do not want to be part of the tax group, such entities can still transfer their losses from one group company to another group company, provided certain conditions are met. As discussed in our previous article, the tax losses of one group company can be adjusted against the seventy-five per cent of taxable income of other group companies that would be receiving the losses. Moreover, the group companies that are exempt or subject to a zero per cent corporate tax regime, would not be allowed to transfer their losses against the profits of other group companies.
The parent entity would be responsible for the administration and the payment of corporate tax on behalf of the tax group, and where the parent defaults, then each member of the tax group will be jointly and severally responsible for the payment of corporate tax. This joint and several liabilities can be limited to the specific members of the group with the approval of the FTA.
The large groups should check the ownership of the group entities and the status of their tax residency. If the entities are eligible to be elected to the tax group, then business owners should align their tax years so that the entities can be added to the tax group to minimise the tax impact and reduce the administration cost. Where the businesses are finding any difficulties in assessing the eligibility of the entities to be added in the tax groups, they should take professional advice for better planning.
Source:https://www.khaleejtimes.com/business/large-groups-can-set-up-a-tax-group-to-minimise-their-compliance-cost
