GIFT City’s International Financial Services Centre has attracted treasury operations, finance companies, leasing platforms and fund management entities seeking access to its regulatory and tax framework. However, the availability of tax incentives does not determine how profits should be allocated between an IFSC unit and its associated enterprises. Transfer pricing continues to require that the returns reported by the unit reflect its actual economic contribution.
Tax Incentives and Transfer Pricing Considerations
Eligible IFSC units may benefit from a deduction for qualifying income under the applicable provisions of the Income-tax Act, subject to prescribed conditions and the relevant tax year.
Where an entity operates within a concessional tax framework, transactions that allocate income to that entity may receive closer scrutiny. The central question remains whether the functions performed, assets employed and risks controlled justify the profits reported.
Establishing Functional and Operational Substance
Regulatory authorisation and a registered office establish a legal presence, but do not independently demonstrate substantive control over business risks.
Decision-makers should possess the authority, expertise and information required to manage the risks attributed to the unit. Its employees, systems and operational resources should also be proportionate to its activities.
For example, a treasury entity that records loans approved and managed by its parent may not be entitled to the full financing spread merely because the loans are booked through the IFSC unit.
Applying the Arm’s Length Principle to IFSC Transactions
Intercompany loans require an assessment of the borrower’s credit profile, loan terms, currency, maturity and available comparable instruments. Guarantee fees, leasing rentals and advisory charges should similarly reflect the functions performed and risks assumed.
A cost-plus return may be appropriate for routine support services where the facts support that characterisation. Activities involving significant decision-making or risk control may require a different remuneration analysis.
Capital Adequacy and Control Over Financial Risks
An entity claiming to assume credit, liquidity or market risk must have the financial capacity to bear the consequences of those risks. Regulatory capital requirements may be relevant, but compliance with them does not automatically establish entitlement to the entire return.
The unit’s capital, decision-making authority and actual conduct should be examined against the risks attributed to it.
Navigating Domestic and International Tax Provisions
Transactions involving IFSC units may require separate consideration of international transaction and specified domestic transaction provisions, depending on the parties and applicable thresholds.
Groups should also assess documentation, reporting and other compliance requirements under the relevant tax regime. The treatment of dealings between a branch and its head office should be examined under the specific statutory framework rather than automatically treated as a transaction between separate associated enterprises.
Conclusion
GIFT City’s tax and regulatory framework can offer significant opportunities, but the allocation of profits must remain aligned with economic substance. Groups should map personnel, decision-making, capital and risk control to the income reported by the IFSC unit, and review the transfer pricing position as its activities evolve.
