How does a foreign company deal with corruption in India?

Any foreign company doing business in India will eventually have to deal with corruption. Prime Minister Modi has made many changes in recent years to improve the situation in the country, but India still ranks 80th in Transparency International's corruption index. As an international company, you want to stay as far away as possible from paying bribes, because this can have serious consequences not only in India, but also in your own country.

Every year, Transparency International ranks 176 countries worldwide on corruption. India is ranked 80.

Clean business takes time

It is still not uncommon in India to be asked for 'speed money', an amount paid under the table to get a permit approved more quickly, for example. Despite the fact that in some cases it seems as if there is no other solution than to pay, we strongly advise international companies against this. Firstly, it is of course forbidden and secondly, it is perfectly possible to do clean business in India. 

For instance, the German IT company Optanium went to India to look for an accounting firm that could set up their entity in India without paying bribes. The process of setting up the company took longer, thirteen months instead of six, but it allowed Optanium India to get off to a flying start. An important tip is therefore to plan enough time for dealing with issues such as applying for licences or the release of your products from customs. 

It is easier for foreign companies not to cooperate with corruption'.

In an interview with Quartz, Ravi Venkatesan, former chairman of Microsoft India and author of the book 'Conquering the Chaos: Win in India, Win Everywhere', explains how companies should deal with corrupt situations. "It is easier for a foreign company not to participate in corruption. The local management can stand firm and say that paying bribes is against their company policy. If a hard line is taken, the bribe-takers will drop out." 

In addition, having a very strong administrative department is essential, according to Venkatesan. "Manage your business with competent, long-term administrative staff who can hold their own in discussions with officials. Many companies do not invest enough in these functions because they do not see them as the core of the business. Instead, they outsource these administrative tasks to local agents, who do pay the 'speed money' and simply bury it in their other expenses."

"Many companies in India do not invest enough in administrative staff. That makes them vulnerable to corruption."

- Ravi Venkatesan

Always your papers in order

Fortunately, there are more and more situations in India where corruption has been completely eliminated because those processes are now automated or better controlled, such as filing your taxes or getting your identification. If you make sure you always have all your paperwork in order and therefore never need special assistance, you can avoid corruption with ease.

Of course, the experts at IndiaConnected can help you ensure that your business is always and in every area compliant. 

Everything you need to know as a CFO about: Transfer Pricing in India

If you are a company operating in multiple countries, you must comply with the legal rules on Transfer Pricing established by the Organization for Economic Cooperation and Development (OECD) in all these countries. This is an attempt to prevent companies from dropping their profits through ingenious constructions in countries with very low tax rates, thus avoiding tax. In India too, these intercompany transactions are closely monitored for this reason. It is therefore essential for a European company with cross-border intercompany transactions to be well aware of and comply with the Transfer Pricing rules in India.

What is Transfer Pricing?

Transfer Pricing (TP) are internal transfer prices for the supply of goods, services or intellectual property rights within affiliated companies. With a transfer pricing policy, it becomes clear where the international company earns its profits and in which countries these profits must be taxed. By means of a transfer pricing policy, it is also clear how the mutual prices of a group of companies are established. 

 Transactions that take place between related parties should, according to the OECD guidelines, follow the so-called arm's-length principle. This means that the transfer price between related parties must be equal to the price charged to each other by independent parties in uncontrolled circumstances. This concerns transactions such as: 

• the purchase, sale or lease of tangible or intangible property, 

• service, 

• borrowing or lending money, 

• any transaction that affects profits, revenues, losses or assets

• Mutual agreement between AEs for sharing costs and expenses.

Transfer Pricing in India

Sections 92 to 92F of the Indian Income Tax Act, 1961 provide guidelines for calculating TP and the procedures to be followed for transactions entered into between two or more companies belonging to the same group. The Indian TP legislation is largely influenced by the OECD TP guidelines, but they are adapted to specifically meet the needs of the Indian tax system.

Scope of application of Transfer Pricing Regulations

Transfer Pricing Regulations (TPR) apply to all companies entering into an International Transaction or cross-border transactions with an Associated Enterprise (AE). The aim is to arrive at an Arm's Length Price (ALP). This is a transfer price equal to the price charged by independent parties to each other in uncontrolled circumstances. In India, this would amount to Market Retail Price (MRP). MRP is the maximum price calculated by the manufacturer that may be charged for a product sold in India. However, retailers may choose to sell products for less than the MRP.

Arm's Length Price (ALP)

The Arm's Length Price (ALP) or the transfer price that parties would have charged if the transaction had been between two unknown parties must be determined in India through one of the following methods laid down in law:

• Comparable uncontrolled price (CUP) method;

• Resale price method (RPM);

• Cost plus method (CPM);

• Profit split method (PSM);

• Transactional net margin method (TNMM);

• Such other methods.

In this regard, the Central Board of Direct Taxes has stated that 'such other methods' can be any method that takes into account the price charged for the same or similar transactions, with or between non-associated companies, in similar circumstances and having regard to all relevant facts.

None of the methods is considered a priority by the Indian tax authorities. The most appropriate method for the transaction is determined on the basis of the nature and class of the transaction or the persons and functions associated with it.

Associated Enterprise (AE)

An enterprise is an Associated Enterprise (AE) if it participates in the management of and/or has control over another enterprise. The participation can be direct or indirect, or through one or more intermediaries. Control is defined more broadly than having shares, voting rights or the power to appoint the management of a company. Having debts and control over different parts of the business, such as raw materials, sales and intangible assets is also included in the legal definition.

Transfer Pricing Documentation

In India, as in Europe, there are documentation requirements for transfer pricing. It is based on OECD guidelines and requires companies to prepare three documents:

1. Master file: This is required to maintain information about the business, including information on financial and non-financial activities.

2. Local file: This should contain all relevant information on intercompany transactions of the company, in each individual country.

3. Country by Country Report (CbCR): CbCR should contain information on income, taxes paid and measures for economic activities in countries where the company operates.

Furthermore, it is also mandatory to obtain an independent audit opinion for all international transactions between AEs. Information on the selection of the most appropriate method for determining ALP must also be maintained. Concerns below the threshold of INR 10 million with and international transactions are not required to keep such documentation. But even in these cases, it is imperative that documentation can be provided to support the arm's-length price selected for the international transactions.

Burden of proof

The responsibility for determining the correct ALP lies with the taxpayer, i.e. the company. The ALP must be in accordance with the applicable Transfer Pricing Laws and supported by the prescribed documentation. If the tax official is of the opinion that: 

• the price charged in the international transaction has not been determined in accordance with prescribed ALP methods,

• information and documents relating to the international transaction have not been stored and maintained in accordance with the TPR,

• the information or data used for calculating the ALP is not correct or reliable,

• the company has failed to provide information or documents that it should have submitted 

- It may reject the company's ALP and hand the case over to a Transfer Pricing Officer (TPO), who will start an investigation. If this reveals that the company has failed to declare certain income, the taxpayer's reported income or the ALP may be adjusted to an amount that is in line with the TPR. In many cases, a fine is also imposed.

These penalties are linked to incorrect transfer pricing in India:

Advanced Pricing Agreements (APAs)

The dispute resolution process in India is slow and very time-consuming. Therefore, the government has introduced an alternative: the Advance Pricing Agreement (APA). APA is a procedural agreement between the taxpayer and the tax authority to avoid transfer pricing disputes by defining in advance a set of criteria to be applied to specific cross-border controlled transactions within a certain period of time and thus the ALP is determined in advance. 

Unilateral APAs with the CBDT protect companies from ALP adjustments initiated by India. It also helps in creating tax certainty, reducing litigation costs and avoiding double taxation. However, the taxpayer has to file an Annual Compliance Report (ACR) annually.

APAs can also be concluded bilaterally, between two countries. In November 2017, India entered into its first bilateral Advance Pricing Agreements (APAs) covering the electronics and technology sectors with the Netherlands.

Checklist for Transfer Pricing in India

The Indian tax authorities crack down very hard on TP malpractices. Non-compliance with applicable TP regulations results in penalties and significant interference in business operations by the tax authorities. Irrespective of the size, companies should pay close attention to ensure that their international transactions comply with the guidelines for TP in India, are robust enough to be audited by tax authorities and are designed to mitigate unintended tax consequences. Therefore, keep the following checklist handy and be prepared at all times:

• Are you familiar with the arm's-length principle? Make sure you are familiar with the TP regulations in India, so as not to be in the dark.

• Know how the arm's-length principle is calculated in India and whether your intercompany pricing meets the applicable TP standards.

• Is your TP documentation in order? Prepare thorough documentation. Prepare annual transfer pricing documentation where necessary.

• Review your policies regularly.

• Always be audit-ready. Usually, audits can go back 3 to 5 years, which makes it even more difficult to have all the right paperwork in place in the blink of an eye.

Special guide for CFOs with operations in India

The Indian tax system can be a real headache for European CFOs with activities in India. In order to provide you with more insight into the complex tax and financial system every CFO in India has to deal with, consultancy firm IndiaConnected has therefore compiled an insightful manual that addresses the most frequently asked tax questions.

We can, of course, support you at all times in such matters. From obtaining all necessary documents for your first export from Europe to taking care of the entire back-office of your Indian entity, so that you can always fully focus on your activities in India. Contact us here.

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Praveen Singal

Financial advisor - IndiaConnected

This article was written in collaboration with IndiaConnected's financial advisor, Praveen Singal.

Singal has over 25 years of experience in establishing successful business strategies for European companies looking to start up in India, corporate financial analysis and compliance.

He is also a qualified Chartered Accountant with a specialization in Indian taxation.

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Fokker Elmo benefits from factory in India: "Our staff in India are better educated and cheaper than in China."

While Fokker Elmo's factory in China had to close several times due to corona measures, the Indian factory of the Dutch manufacturer of aircraft wiring systems continues to operate as usual. A few years ago, Fokker Elmo chose to spread risk: no factory expansion in China, but a new factory in India. "In India we found not only a large supply of better trained personnel, but also lower labor costs than in China," says Maarten Durville, director of the Indian production hub.

Fokker Elmo factory in India under construction

"If as a company you have the luxury of spreading risks, you have to do that," Maarten explains. "We would be in a quandary now if we had only bet on China." The Fokker Elmo plant in China had to close several times in recent pandemic years. According to Maarten, the aerospace company's other factories cannot take that hit directly. "But it makes you less vulnerable as a manufacturer if you are in several places around the world. In addition, India also offers us opportunities that we don't have in China."

India's aviation sector is growing like a coalition. Not only the commercial sector, but also the defence arsenal is expanding considerably. "By opening a factory in India, we are offering our customers an interesting combination: good products at a competitive price and the opportunity to do a deal with the Indian government." There has been speculation for some time about the possible purchase of Boeing's Super Hornet Fighter by the Indian government. "And they want something in return for such a large purchase. Boeing can then say: 'Look, we are building in India through Fokker Elmo and thus also creating jobs in India. So that makes us an extra attractive partner for Boeing."

Local support

The plant in India has been operating for a few years now, but did experience some start-up problems. "We had two major delays, one was internal and the other had to do with getting permits. That takes an incredibly long time in India." Maarten had support from an Indian project manager during the set-up, and even though there is a lot of knowledge at Fokker Elmo about starting a plant abroad, that help was much needed. "I couldn't have done it without him. It was all so much work: from property registration to obtaining the license for operation. Indians are extreme on the comma."

But an Indian project manager alone was not enough to get everything running. "For all corporate reporting we work with local accountants and for the recruitment of the right employees we have Indian consultants in our team". At the moment, Maarten manages about 40 people, which should grow to 800 in about five years. And they will have to be able to participate in the hybrid, international business culture that Maarten is shaping within the company. "I would like to retain the Indian ambition and enthusiasm, but I am replacing the hierarchy with Dutch openness, so that everyone can freely contribute their ideas and dare to voice criticism.

Director Maarten Durville and his team in front of the Fokker Elmo factory in India

Business culture in India

Maarten cultivates openness in various ways. For example, he holds a monthly session with the management in which the values of Fokker Elmo are discussed. Everyone who participates must then give good and bad examples of the open corporate culture. "Personally, I like the introduction of our joint lunch," says Maarten. "When I started, I suggested we all have lunch together, at a long table. So the managers, engineers, operators, all mixed up together and next to each other. That's not at all common in India and I got very different reactions." It was mainly his young employees, under 35, who thought it was a terribly nice idea. The more senior employees had to get used to this Dutch initiative. "And then there was the group who immediately said: 'We'll get the cleaners! Not to join them for dinner, but to clear the tables. I explained to them that we could do that ourselves.

Maarten is very pleased with the quality of his staff. "I heard a lot of stories before I left for India. That there would be a lack of knowledge and dedication among employees, but I see just the opposite. They dare to take ownership for their successes, but also for their mistakes. I hardly come across that outside my team in India." When working with local parties and contractors, Maarten regularly runs into the same problem. "Here, they often give you the answer you want to hear. For example, during the construction of the factory I was often told by contractors that a certain task would take about three weeks, but in reality it would take six. If they told me the truth, I could come up with a solution, but the delay would be glossed over. Fortunately, my team has learned from that."

Recruiting talent in India

The local HR consultants recruit the team with the utmost care. "We do a lot of campus recruitment, and we also try to enthuse as many women as possible to come and have an interview with us. It is a tough job, especially when you are looking for women with a technical background, but we have some very good ones in our team at the moment. Now the question is whether they will also stay with us when they get married." Maarten hopes that the good terms of employment that Fokker Elmo offers can keep them on board. But the factory has also applied for a subsidy from the regional government. "We are trying to get a subsidy to train and employ more women in the company, but it is not yet clear when we can start. The process takes a long time."

It wasn't possible to just submit some forms to have Fokker Elmo compete for the regional pot. "I really learned that you have to go out there. The best thing is not to make an appointment at all, but to just walk into a regional ministry at random and see if you can get a hold of the person responsible. This has helped me a lot so far, this personal contact opens doors that would otherwise remain closed. My project manager said to me for a reason: 'Maarten, a no is not the end'.