Transfer pricing disputes: Interest payout relief coming for MNCs

CBDT issues draft notification on interest computation

NEW DELHI, JUNE 20

The Central Board of Direct Taxes (CBDT) proposes to provide a relief to MNCs on the interest payable by them on the untaxed profits stashed abroad, requiring to be repatriated back to India under the transfer pricing regime.

It now plans to ease a rule on the manner of computation of interest in the case of MNCs opting for a Mutual Agreement Procedure (MAP)/Advance Pricing Agreement (APA) process to settle transfer pricing disputes.

The relief — on the computation of interest — would arise only in situations where the APA/MAP resulted in a secondary transfer pricing adjustment for the taxpayer The CBDT has come out with a draft notification that specifies that interest (on secondary adjustments) would have to be paid from the date of resolution of MAP/APA.

Currently, the income-tax rules specify interest on secondary adjustments would have to be computed from the date of return of income.

This rule was seen as a burden and many tax experts felt that it was not fair to force a taxpayer to pay interest from a prior period before the resolution under APA/MAP came into effect.

Now, the CBDT seeks to correct this through a change in the date from which interest would be computed.

An APA is an agreement between a taxpayer and the tax authority concerning the transfer pricing method and the rate applicable to the taxpayers’ inter-company transactions, and normally covers multiple years.

What is MAP?

MAP is a procedure that allows the Competent Authorities from the governments of the Contracting States to interact with the intent to resolve international tax disputes.

In the recent years, the Centre has not only been eyeing a fair share of taxes on international transactions undertaken between related parties of a multinational network with presence in India, but even untaxed profits stashed overseas.

Last year through new measures — popularly called secondary adjustment provisions under transfer pricing — the government made sure that profits parked abroad via such transactions come back to India within a specified time limit.

Under this move, the excess money (primary adjustment over ₹1 crore) that is available with the foreign associated enterprise, if not repatriated to India within the prescribed time, will be “deemed” as an “advance” and interest on such advance (loan) will be levied till the money comes back to India.

This interest income will also be taxed in the hands of the Indian affiliate entity, the Government had said.

Experts’ take

Rahul Mitra, Partner, Dhruva Advisors LLP, said the latest CBDT move is indeed welcome and would remove undue hardship to taxpayers, which the government would have not intended. “The earlier situation of counting interest from the date of return of income for MAP/APA cases involving secondary adjustments was not workable. The CBDT has now come with a more practical solution,” Mitra told BusinessLine.

Rakesh Nangia, Managing Partner, Nangia Advisors LLP, said this can be seen as a clarificatory amendment to provide relief to MNCs operating in India and who have opted for APA or MAP programme to obtain certainty with respect to their transfer pricing positions in India.

Sanjay Kumar, Senior Director, Deloitte India, said that certainty and predictability on tax matters are always useful and the draft intends to bring that.