India and US settle 100 tax disputes

The development is expected to pave way for greater transfer pricing cooperation between the two countries, enhance investment flow

In a significant boost to investor sentiment - especially for multinational companies - India and the US have solved over 100 transfer pricing disputes for sectors such as information technology (software development) services (ITS) and information technology-enabled services (ITeS) over a one-year period.

This is expected to pave the way for greater transfer pricing cooperation between the two countries, a development that is likely to enhance foreign investment flow.

More cases are expected to be solved by the end of the financial year, the Central Board of Direct Taxes said in a statement on Thursday.

The move is directed towards the broader objective of the government to improve the ease of doing business.

India signed the framework agreement with the US revenue authorities in January, 2015, seeking to resolve about 200 transfer pricing cases. The framework was finalised under the mutual agreement procedure (MAP) provision contained in the India-USA Double Taxation Avoidance Convention (DTAC).

Encouraged by the success of the framework, the US has opened the bilateral advance pricing agreement (APA) programme to India.

“Prior to resolution of disputes under the framework agreement, the US bilateral APA programme was closed to India. The US is expected to begin accepting bilateral APA applications shortly,” the CBDT said.

Amit Maheshwari, managing partner, Ashok Maheshwari & Associates, said this was a very good development from the perspective of bilateral APA, which would give a further boost to the successful APA programme in India and underscores the improving ties between Indian and US MAP authorities.

An APA is a multiple year contract between a taxpayer and at least one tax authority specifying the pricing method that the taxpayer will apply to its related-company transactions. Bilateral APAs involve the taxpayer, its local subsidiary, the Indian tax authority and that of the country the company is headquartered.

The bilateral APA will re-open an option for US-owned companies to manage their transfer pricing risk in India. The rollback provision combined with a bilateral APA will allow for as many as nine years of transfer pricing issues to be resolved.

“These are positive developments and would certainly boost MNCs’ confidence in the Indian market. The developments also lend credence to the belief that the Indian APA programme and a streamlined MAP programme is expected to go a long way in creating an environment of tax certainty and encourage MNCs to do business in India,” said Amit Agarwal, partner, Nangia & Co.

APAs provide certainty to the company operating in India and avoid conflicts over sharing of taxes between India and the other country and reduce transfer pricing disputes.

The first rollback APA was signed last August between a US multinational and the tax department. Up to September 2015, more than 575 applications have been filed with the APA authorities.

It is interesting to note that roughly over 40 per cent of APA applications are from the IT & ITeS sectors, consistent with the litigation trends that have been observed.

The MAP programmes with other countries like Japan and the UK are also progressing well with regular meetings and resolution of past disputes. “The CBDT is confident that a combination of a robust APA programme and a streamlined MAP programme would be helpful in creating an environment of tax certainty and encourage MNCs to do business in India,” the nodal department for direct taxes said.

The CBDT has so far signed 39 (38 unilateral and one bilateral) APAs, with 30 agreements in the current fiscal alone.

“This is a very positive development in the first month of the new year. A significant number of MAP cases were pending for resolution for some time now.  The same within one year of the framework agreement between CAs of India and US is very creditable,” said Samir Gandhi, partner, Deloitte Haskins & Sells LLP.

He added that with satisfactory resolution of IT & ITeS cases, one can now focus on more complex cases for payment of royalty and management charges and cases involving application of profit split method.

India is also working to put in place procedures and practices to enable speedy resolution of tax disputes through the MAP route through legislative and administrative changes in compliance with BEPS (base erosion and profit shifting).

Ease of doing biz

• The move expected to pave the way for greater transfer pricing cooperation between India and the US
• It is directed towards the broader objective of the government to improve the ease of doing business
• More cases are expected to be solved by the end of the financial year, says the Central Board of Direct Taxes