Global Firms Negotiate for Protection From India’s Tax Authorities
As Indian tax authorities have been slapping foreign firms with billions of dollars in unexpected tax bills, hundreds of global companies are now negotiating with the taxman here to clarify ahead of time what they will owe in the future, hoping to avoid surprises.
In the past five years there has been a jump in the amount of extra money Indian tax authorities have been demanding beyond what companies first pay. The additional taxes are a result of what tax officials see as mistakes in how the multinational companies record transfer pricing or the money they paid and received from other companies that are part of their global group but outside of India.
Tax authorities in India and elsewhere worry that companies with operations in many countries adjust the way they record transactions between their different arms so that their units in high-tax countries, such as India, show less profit or even losses.
The amount of extra income India’s revenue department says it has added to multinational firms’ incomes due to transfer pricing has jumped from 12 billion rupees ($196 million) in the year ended March 2005 to 590 billion rupees last fiscal year.
High profile tax disputes involving the Indian units of Vodafone Group PLC, Royal Dutch Shell PLC, HSBC Holdings PLC and others in recent years have triggered worries about how transfer-pricing is measured in India.
Last week, the Bombay High Court ruled in favor of Vodafone in a transfer pricing case in which Indian authorities were demanding 36 billion rupees.
In an attempt to reduce uncertainty, Indian tax authorities started accepting advance pricing agreements in 2012 which allow companies and the government to agree on transfer pricing ahead of time. While more than 400 companies have applied to set up the pricing agreements, only a handful have been finalized so far as they usually take years to negotiate.
The agreements may mean companies will have to pay higher taxes in India but they will give firms much-needed certainty about their exposure in Asia’s third-largest economy.
“There is a lot of heart burning that has happened over transfer pricing disputes which people think of really as an obstacle for (successful) business in India,” said Rohan Phatarphekar, a partner at KPMG in India.
The agreements will likely give tax payers some shelter from skeptical tax authorities for a total of nine years–the four tax years before the agreement is signed and the five after.
Advance pricing gives companies more peace of mind and protects them from court cases that can run for years, said Samir P. Gandhi, Partner, Deloitte Haskins & Sells LLP in India.
“Taxpayers are more concerned about certainty than payment of tax,” said Mr. Gandhi.