Indo-US tax thicket close to resolution

Written by Santosh Tiwari | New Delhi | Updated: Dec 27 2013, 06:13am hrs
TaxWhile the Indian side has put forward the APAs, the US tax man?s response is awaited. Reuters
A solution to the growing Indo-US tax disputes may be reached as early as next fortnight, a senior tax official said, with the US expected to respond to the proposals put forward by the Indian side as part of the mutual agreement procedure (MAP) to resolve tax cases.

Of the 100-plus US firms such as Microsoft that have disputes with Indian tax authorities, around 70 have already filed for a solution through what are called advance pricing agreements (APA), which detail the manner in which various expenditure and income are to be treated by the tax authorities for a period of five years. While these are unilateral APAs in the sense they are not recognised by the US tax man, the MAP solution being sought is to convert them into bilateral APAs.

Converting them into bilateral APAs means the US tax man will also give the assessee firm deductions for the taxes paid to the Indian authorities as per the APA.

While the Indian side has put forward the APAs, the US tax mans response is awaited.

If all 70 APAs get converted into bilateral APAs, in a sense, this would mean 70% of the outstanding tax disputes at least in terms of the number of companies involved would be resolved.

We are expecting a favourable response from the US side soon and the moment Indian and US tax authorities accept an agreement, most of the unilateral APA applications filed by the US companies will turn into bilateral applications. This will resolve those cases fast and once bilateral APAs are concluded, there would be certainty in tax treatment of the transactions made for at least five years, which will take care of the uncertainty and litigation both, said an official.

Senior officials from the finance ministry in the know of the development said that under the framework being looked at, US companies involved in these cases would file for bilateral APAs involving both the Indian and US revenue departments.

While Microsoft's Indian arm has been asked to pay increased taxes with the tax man saying the local arm had understated its income from FY06 to FY09 by Rs 5,135 crore, similar demands have been made on such transactions of other multinational companies in the last two to three years.

While Indo-US MAP negotiations had got stuck with the US side not willing to even sit down for discussions as long as SK Mishra was the joint secretary in charge of the international tax division, talks resumed on July 10 after he was replaced by Akhilesh Ranjan the transfer order was made official when finance minister P Chidambaram was visiting the US to woo investors.

Taking into account firms based in countries other than just the US, a total of 150 APA applications have been filed since it was introduced in 2012, 119 unilateral and 31 bilateral ones. Unilateral APAs normally take between six months and one year to conclude and are between the company and the revenue authority of the country concerned while bilateral APAs take about two years to get done and are between the company and the two countries of its operation.

Out of the 31 applications filed for bilateral APAs, most are from Japan and the UK. The interest shown by the MNCs in APAs indicate that the number of applications would rise substantially in the next financial year; the applications start coming in March, said an official handling APA applications, adding, A substantial number of the ones in the advanced stages of processing are expected to be signed and take off next year.

After the furore caused by the rash of transfer pricing adjustments in FY12 and FY13, the government offered two solutions APAs were offered in 2012, and a year later, safe harbour rules were offered as another solution. While additions to the income of MNCs were made in 49% of the cases totalling Rs 23,237 crore in FY11, the numbers shot up to 53% and Rs 45,385 crore in FY12. And in FY13, the transfer pricing adjustment again rose by 54% to Rs 70,016 crore, which included high-profile cases like Microsoft, Maruti and Shell. Transfer pricing orders for FY14 are expected in the next few weeks.