COVID-19 impact: Transfer pricing issues may crop up at MNCs

MUMBAI: Indian entities of many multinationals, which receive a fixed margin or a mark-up from their parents, fear they could face transfer-pricing issues due to Covid-19. This is because the MNCs are renegotiating and slashing these fixed mark-ups, which the tax authorities may see as an anomaly and question.

Transfer pricing is essentially the price paid by the parent company or its foreign arm to a local subsidiary for transactions among them. In most cases, the local entity charges a mark-up at arm’s length, or at a price as per industry average.

Industry trackers said many multinationals facing margin pressures due to the coronavirus outbreak were renegotiating these mark-ups. This would mean the margins for Indian entities of the MNCs could come down. The tax authorities, experts said, might not agree with the markdowns.

“There is going to be an impact of Covid-19 on cost-plus mark-ups that all the Indian entities charge to parent or foreign entities. This will lead to transfer-pricing issues as the taxman may not accept reduction in mark-up,” said Rohit Jain, partner at law firm ELP.

Multinationals including Google, Microsoft and IBM could face these issues, say industry trackers. For many companies, the mark-ups are in the range of 18-20%. The fear is that mark-ups could fall to as much as half, leading the taxman to question the dip and slapping additional tax. This is set to impact almost all multinationals that have captive units in India and operate on a fixed mark-up model, said tax experts.

“Margins for the year are set at the beginning of the year relying on previous-year comparable margins. This would probably not be the case for FY20-21 as the results will be severely impacted due to substantially weakened business environment in light of Covid-19,” said Amit Maheshwari, a partner at tax consultants AKM Global. “We expect most of the companies to have subdued margins in FY20-21, which will help captive service providers also justify the lower margins expected by the parent company.”