Obama in India: India, US finalise framework to resolve transfer pricing cases
NEW DELHI: India and the US have finalised a framework to resolve transfer pricing cases, some of them pending for five years, in what could end tax trauma for more than 50 American MNCs such as Microsoft, IBM and Oracle by the fiscal year-end and send a strong signal to overseas investors that the Modi government is indeed committed to a non-adversarial tax regime.
With President Barack Obama arriving in a few days, officials of the two countries are trying to hammer out agreements on various pending issues. Under the transfer pricing deal, both sides have also agreed to respect bilateral advance pricing arrangements.
Bilateral advance pricing arrangements (APAs) would allow American companies to ascertain their tax liability in India beforehand, said a government official aware of the development. Tax authorities will be able to resolve as many as 50 of the nearly 200 pending cases before the end of the financial year. This could save companies thousands of crores of rupees in tax claims.
Transfer pricing relates to charges levied on each other by various entities belonging to one large company for services rendered. The issue has generated much heat in recent times with companies being slapped with stiff tax bills based on differing interpretations of transfer pricing rules. An APA allows a company to ascertain tax liabilities ahead of time and not be rudely surprised, which is in line with Finance Minister Arun Jaitley’s oft-repeated statement that he wants to reverse the antagonistic approach of the tax department under the previous UPA government.
The endorsement of India’s APA programme by US tax authorities will reassure investors as their tax credits won’t be challenged. “This is a huge relief for various taxpayers who have transactions with related parties in the US,” said Vijay Iyer, transfer pricing leader, EY. “US multinationals would then be able to utilise the APA forum for mitigating the risk of tax litigation on transfer pricing matters. Certainty on transfer pricing issues would boost investor confidence as well.”
Both sides had reached a broad understanding on the contours of the framework in September 2013 but an agreement could not be concluded after the US hardened its position on many aspects of taxability. Several rounds of discussions and new warmth in the relationship following the meeting between Modi and Obama in the US in September helped lead to the breakthrough. Under the alternate dispute resolution mechanism known as MAP, or mutual agreement procedure, the competent authorities in India and its treaty partners will be able to negotiate a settlement that’s acceptable to both.
The main advantage of MAP is the elimination of double taxation arising out of transfer pricing disputes, clarity on the existence of Permanent Establishments and characterisation of income and attribution of profits to such establishments. Under MAP, which is the preferred method of settling cross-border tax cases globally, the two sides can resolve a dispute that can subsequently be taken out of the formal legal process. The process draws up parameters for taxation in one country for which credit would be available in another. India and the US had last used the mechanism in 2010 to settle a number of cases, after which differences cropped up and the process was derailed.
Differences between the tax authorities also came in the way of the APA programme with the US refusing to recognise India’s APA regime despite American companies being keen to do so. India’s APA programme, rolled out in 2013-14, has been a big success with multinational companies and the country has concluded its first bilateral APA with Japan.
With the US now agreeing to endorse India’s APA programme, investment flow from that country could receive a big boost. An APA is usually for five years and is signed between a taxpayer and the tax authority on an appropriate transfer pricing methodology for determining the price and ensuing taxes on intra-group overseas transactions.
