It is highly essential for multinational enterprises to come up with different
workable business strategies to compete in today's economy. One such strategy is
business restructuring. Business restructuring is an activity wherein companies
significantly modify their financial and operational aspects of a company.
tedious process requires proper documentation and might lead to changes in the
Transfer Pricing model of the MNEs. Cross border transfer pricing leads to
change in their Transfer pricing models eventually affecting their tax
structure. Transfer pricing has become an important tax issues in the current
globalized economy, especially for the tax administrators and taxpayers in terms
This is not only for the apparent tax revenue collection that may
be affected but also because transfer pricing in itself is a complex procedure.
Business restructuring is one area that can lead to great transfer pricing
issues since it involves allocation of taxable profits for multinational
enterprises and the countries in which the MNE has its enterprises. In the below
article, I have tried to bring out the implications on business restructuring
from a transfer pricing perspective.
Business restructuring from a TP perspective
There is no general or legal definition for the term business restructuring.
From a transfer pricing perspective, business restructuring maybe said as the
cross-border redeployment by a multinational enterprise of functions, assets
and/or risks. It can also involve cross-border transfers of valuable
Business restructuring may also or alternatively involve the
termination or substantial renegotiation of existing arrangements. A business
restructuring typically leads to a reallocation of profits among the members of
the MNE group, either immediately or in the future. Business restructurings can
also be inclusive of the rationalisation, specialisation or de-specialisation of
operations including the downsizing or closing of operations. The OECD Transfer
Pricing guidelines recognize the following as the methods by which business
restructuring can be carried out.
- A controlled transaction that leads to the cross-border reorganisation
of the commercial or financial relations between associated enterprises (AE).
For instance, the conversion of a full-time manufacturer into a contract
manufacturer can be said to be a reorganisation for this matter.
- Amalgamation or merger of two associated enterprises to form a single
entity or demerger of a business unit of an enterprise with an associated
- A business restructuring for the purpose of transfer pricing could also
involve cross-border transfers of something of value, even if it is not
always the case,
- Termination or substantial renegotiation of existing arrangements
- Change in pricing policy, for example, change in mark-up on operating
cost from 20% to 15% Change in remuneration model.
- Renewal of agreement with alterations in terms and conditions.
In analyzing if the business restructuring activities are relevant from the
transfer pricing perspective, the following aspects may be considered by the
- Reallocation of profit potential:
Upon reallocation of the profit potential, a compensation payment to the
entity giving up such potential by means of transferred functions and/or
risks may be warranted.
- Transfer of something of value:
A transfer of something of value maybe a tangible asset, intangible asset
and even transfer of rights of such assets.
- Termination of existing agreements:
If agreements are terminated or renegotiated to the harm the restructured
party, an assessment whether an indemnification needs to be paid to ensure
arm's length conditions must be effected in this regard. Hence, along with
the terms and conditions of agreements between related parties, any change,
renegotiation or termination of such contracts should also be carried out
under arm's length conditions.
The OECD Model Convention on business restructuring
Article 9 of the OECD Model Tax Convention deals with adjustments to profits
made for tax purposes between associated enterprises on the arm's length
terms. Business restructuring is accompanied by the reallocation of profits
among the members of the MNE group either immediately or for a few years. The
OECD guidelines insist that the arm's length principle and the Guidelines do not
apply differently to restructuring or post-restructuring transactions than to
transactions that were structured as such from the beginning.
The OECD, in its report, Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administration, provides strategies for the application
of the arm's length principle for enterprises in terms of business
restructuring. Analsying transfer pricing of business restructuring primarily
involves accurately delineating the transactions that account for business
restructuring by identifying the financial and commercial relations.
then followed by looking into the conditions attaching those relations that
lead to a transfer of value among the members of the MNE group. Such business
transaction must be carried out according to the arm's length principle. The
arm's length principle is an important tool for MNE and tax administrations when
dealing with international taxation issues within the Transfer Pricing area.
main purpose of applying the arm's length principle is to find transactions
between independent enterprises so called comparable uncontrolled transactions
and determining if they differ from the controlled transactions found between
associated enterprises. even if there are no comparable transactions, a
comparability analysis still needs to be performed in order to determine what
independent enterprises would have done if they had been in a similar situation.
the arm s length principle does not require compensation for a mere decrease in
the expectation of an entity s future profits or for a mere transfer of FAR.
question of an exit charge arises only where there is a transfer of something of
value -rights or other assets or a termination or substantial renegotiation that
would be compensated between independent enterprises in comparable
The onset delineating the transactions comprising the business restructuring
between the MNEs is when the conditions of the business restructuring have been
formally agreed in writing by the MNEs. The terms in the contract may describe
the roles, responsibilities and rights of the restructured entity under the pre
restructuring arrangement including the relevant situations that existing under
contract and commercial law and the extent and manner to which those rights and
obligations change due to the business restructuring that is carried out.
However, where there is no written terms, or where the facts of the case and the
conduct of the parties differ substantially from the terms agreed between them,
the actual transactions comprising the business restructuring must be inferred
from the facts as established, including the conduct of the parties. The focal
point is what the parties actually do, their capabilities, and the type and
nature of assets used or contributed by the parties in a pre-restructuring and
What does the UN Model Tax Convention say?
The UN Practical Manual on Transfer Pricing (2021) is in line with the OECD
Transfer Pricing Guidelines. The application of Article 9 of the UN Model Double
Taxation Convention to business restructurings establishes that the arm's length
consideration for any kind of transaction be it a supply or acquisition or
transfer of property is that which might reasonably be anticipated to be made
between independent parties under an agreement dealing at arm's length. Business
restructurings predominantly affect developing countries. Recently, a number of
large MNEs have either:
- Transferred their manufacturing facilities into low-cost countries, e.g.
where the cost of labour of a skilled workforce is lower and/or
- Similarly moved certain distribution functions and/or
- Similarly moved valuable intangibles out of the jurisdiction where they
were acquired, developed or exploited.
What is the Indian law on transfer pricing of business restructuring?
Business restructuring are within the scope of regulations primarily consist of
internal reallocation of functions, assets and risks within a Multinational
Enterprise, even though relationships with third parties may also be a cause for
the business restructuring and/or be affected by it.
According to section 92B of the Indian Income Tax Act, 1961 an international
transaction is "a transaction between two (or more) associated enterprises
involving the sale, purchase or lease of tangible or intangible property;
provision of services; cost-sharing arrangements; lending/borrowing of money; or
any other transaction having a bearing on the profits, income, losses or assets
of such enterprises".
Finance Act 2012 inserted an explanation to this section with retrospective
effect from April 1, 2002 that has an inclusive list of transactions
specifically to include business restructuring.
ICAI updated Guidance note report in transfer pricing certificate in Form 3CEB
that restructuring could take place in the form of operational change in
functional, asset and risk profile of the entity. It can also take place as an
organizational change in ownership structure or management of the entity and
also include a change in the nature and/or scope of transactions among the
controlled entities, a change in responsibility for specific functions or
commencement or termination of a relationship, a shift in the allocation of
risks, etc. The taxpayer has to comply with these laws along with pre and post
functional analysis and arm's length pricing.
Multinational Enterprises are entitled to organize their activities as they feel
right. Business restructuring as long as they are in line with the transfer
pricing conditions. The applicability of the arm's length principle may not
sound that complicated but finding a comparable transaction can in many cases be
very hard to accomplish. For business restructurings of intangibles with an
uncertain value at the time of the restructuring, it can be deemed very
difficult to find a comparable uncontrolled transaction.
A key feature in understanding the underlying commercial rationale of a business
restructuring is identifying the economic benefits expected from the
restructuring. Businesses should plan their transfer pricing policy in advance
i.e., even before implementing the transactions. Only then that businesses can
adopt strategies to achieve the most effective tax planning. The MNEs must
prepare a detailed and exhaustive transfer pricing documentation making it
easier to find out the validity of such business restructuring in terms of
- Anonymous, Business restructuring from a TP Perspecive- fundamentals,
Taxguru, , https://taxguru.in/income-tax/business-restructuring-tp-perspective-fundamentals.html#:~:text=Business%20restructurings%20that%20are%20within,also%20be%20a%20reason%20for (26th April
2022, 7:53 pm)
- Confirming amendments to Chapter IX of the Transfer Pricing Guidelines,
Base Erosion and Profit Shifting (BEPS), https://www.oecd.org/tax/transfer-pricing/conforming-amendments-chapter-ix-transfer-pricing-guidelines.pdf (25th April,
- OECD (2022), OECD Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations 2022, OECD Publishing, Paris, https://doi.org/10.1787/0e655865-en.
(23rd April 2022)
- Mehta Darpan, Parekh, Mohit, Transfer Pricing aspects of business
restructuring- Navigating uncharted territory!, Taxsutra, https://www.taxsutra.com/tp/experts-corner/transfer-pricing-aspects-business-restructuring-navigating-uncharted-territory (20th
April, 2022, 9:00pm)
- Section 92B of the Income Tax Act 1961