DTAA: How will help it India & US taxpayers?
India and US reach common ground on Mutual Agreement Procedure (“MAP)” and break new ground on Advance Pricing Agreements (“APA”)
Suchint Majmudar
Just ahead of Obama’s momentous R-Day visit to India, the Competent Authorities of India and US reached a landmark breakthrough in cases involving mutual agreement procedure under the double tax avoidance agreement between the two countries. Mutual agreement procedure is invoked by taxpayers that suffer economic or legal double taxation arising out of issues such as permanent establishment and transfer pricing.
This deal assumes significance as matters involving transfer pricing adjustments had been accumulating since Financial Year 2005-06 and there were over 100 such cases, as no resolution had been reached since the last almost 3 years. This was frustrating for US MNCs, as many of them had provided bank guarantees under the India US treaty to stay the tax demand and due to the logjam, could neither attain double taxation relief, nor could they contain the interest cost that would apply on the eventual demand that would result.
As a result, many US MNCs had to resort to litigation, which got them considerable relief at the Tribunal level, but it entailed invoking a parallel domestic dispute resolution process, that was quite prolonged, with the added rider that it may not provide them relief from double taxation.
The agreement seeks to provide a framework to resolve several pending cases by reaching common understanding on a host of issues in principle on use of inter quartile range, choice of comparables and attribution of profits to Permanent Establishments. Based on this pact, it is expected that the MAP process will make progress, with the idea being that by March 2015, very many outstanding cases would be cleared.
The determination of such a framework to resolve MAP cases comes as a
source of huge relief for taxpayers and tax authorities alike.
From a taxpayer standpoint, this will bring to a close the uncertain tax positions that the taxpayers had been providing for. This will also enable them to attain double tax relief and close out several years in a row that have essentially the same issues involved. Being a US-India bilateral process, it is expected that adoption of international principles such as multiple year data and inter quartile range will enable the outcome to be more reasonable, as compared to the high pitched audits.
Indian tax authorities would stand to benefit as the cases could be closed with the moneys locked up in guarantees being made available to liquidate the eventual demand. The changes in the Finance Act of 2014 should facilitate and accelerate the MAP process particularly since they are procedural and have now been affirmed by the Court. The IRS will also be able to provide corresponding double tax relief. In the process, they would have to reopen US taxpayer returns in order to determine the correlative impact.
In short, the framework does pave the way for a successful, ‘better late than never’ resolution of many cases that had common sticking points.
Although the focus is to first clear the MAP cases before dealing with bilateral APAs and rightly so, on account of large pendency, the acceptance in principle by the US of the bilateral process and its concurrence that India is on the right track with its APA program will give a great deal of confidence to US MNCs. Immediately, India ought to rise in the priority list of investment destinations because APA is about the future and the rollback provisions assist in this process. Certainty around the tax and transfer pricing landscape through advance rulings and APAs will come as a shot in the arm to US investors who could now leverage on APAs for accurately determining their effective tax rate for future investment. The timing of this accord around the US presidential visit is not lost on the business community, with the diplomatic relations between the two democracies also looking extremely positive.
Over the last several months, India has signalled its clear intention to walk the talk in order to become a more investor friendly jurisdiction in terms of tax certainty and expeditious dispute resolution. The decision to migrate to an internationally accepted range concept in determination of arm’s length price, admission of multi-year data, expeditious and well-reasoned resolution of the famous Shell and Vodafone cases by way of writ and its sportive acceptance by the Indian Cabinet, reaching a bilateral APA with Japan and now arriving at a framework for resolution of MAP cases and getting the US on board for bilateral APAs are all very direct indications that the inertia around dispute resolution has all but gone away.
With the India Budget a month away, we should continue to see more such policy measures being taken towards improved tax administration that also encompasses proactive controversy management.