Our Managing Director, Mr Thanneermalai sheds light on the newly introduced transfer pricing surcharge. Find out how this new introduction impact taxpayers on this episode of Take 5 with Thannees.
BUDGET 2021 has introduced a new form of penalty but it is not a penalty. It is something called a surcharge. A surcharge is something that you pay on the top of something else. So, it is not a tax. It is not a penalty but effectively it is like a penalty.
So, at the moment what they have introduced is a surcharge. There will be a 5% surcharge whenever there is an adjustment made to transfer pricing. So, if there is a transfer pricing adjustment there will be a 5% surcharge whether you have additional tax to pay or not. For example, if you have a company with the losses and if there is transfer pricing adjustment that increase the taxes, it absorbs the capital allowances or the losses brought forward, you have no tax to pay so there will be no penalty.
But now with the introduction from 1st January 2021 there will be a 5% surcharge which means whenever there is a transfer pricing adjustment there will be a 5% surcharge whether you have a tax- exempt company which is a tax holiday company or company with tax losses, capital allowances which it absorbs and there is no additional tax to pay. So practically every adjustment they make, the IRB, you will have an additional 5%.
Now this 5% is not even regarded as a penalty so you may not even be able to appeal as a penalty. The only way which you can get this surcharge reduced is you got to go to actually literally beg the Director General and he has within his powers to remit the penalty. So at the end of the day you rely on his discretion to reduce the surcharge. There is no penalty provinces at the moment to actually automatically appeal on the surcharge so you got to be careful. That means you must prepare your contemporaneous documentation very well because if you end up disagreeing with the Inland Revenue Board, although you are right and maybe you are proven right in the court tomorrow, there will be a surcharge upfront.
So preparing annual TP documentation and preparing it comprehensively so that you can defending and satisfy the authorities and avoid an adjustment is a must in order to avoid a surcharge. So please bear in mind this is an entirely new concept and know well there is such a thing in Income Tax Act. This 5% surcharge means any adjustment so preparing TP documentation and having your transfer pricing policies and getting your price in right for transfer pricing list is utmost important.