The aggressive approach of Indian tax authorities on transfer-pricing and international tax matters underlines the governments intention of taking strong action to defend its tax base. When it comes to taxation of cross-border transactions, Indias inclination to widen the source-based tax rules is clearly demonstrated by the retrospective amendments introduced in 2012 relating to indirect transfers and widening of the scope of royalties which is dragging several MNCs into long-drawn litigation. The consequent gloom and uncertainty had admittedly impacted Indias image as an attractive investment destination among foreign investors; however, it is unlikely that the government would have anticipated that these tax disputes would travel to arbitration of international scale.
While fiscal disputes are becoming the new normal for MNCs in India, they are also grappling with the current dispute resolution mechanism under the Indian legal system. Experience shows that a case takes at least 15 years to attain finality. As is typical of the Indian judicial process, speedy resolution of disputes is rare due to huge pendency of cases and inadequate infrastructure plaguing the judicial system of the country. As per reports, more than 32 million cases are pending in high courts and subordinate courts across the country. The Supreme Court itself had a backlog of approximately 66,349 pending cases as of December 2013. In such a scenario, MNCs are wary of having these high stake disputes settled in Indian courts.
The Double Taxation Avoidance Agreement (DTAA) provides for the Mutual Agreement Procedure (MAP) as a framework to resolve certain cross-border tax disputes arising from interpretation of the DTAA provisions. However, the applicability of the MAP is limited to certain category of disputes and the efficacy and success of the MAP practically depends on the approach, discretion and relationship of the competent authorities of both countries. MNCs largely are using the MAP as a protective measure as against a serious measure to resolve international tax disputes.
In the given circumstances, there is an increasing trend of MNCs invoking international arbitration as a last resort to resolve disputes with the government on both fiscal and non-fiscal matters. As many as 17 MNCs have reportedly taken the Indian government to international arbitration for a speedier and binding resolution of their disputes. For example, telecom giant Vodafone, facing a R20,000 crore tax dispute in India, has commenced international arbitration under the Bilateral Investment Treaty (BIT) between India and the Netherlands. The governments action to retrospectively amend the domestic tax law to overrule the Supreme Court decision in favour of Vodafone has aggravated the issue. Subsequent steps taken by the government to initiate a conciliation process to amicably settle the dispute also failed to take off, leaving no option for Vodafone but to resort to international arbitration.
Nokia also sought conciliation under the India-Finland BIT to amicably resolve its tax dispute with the government of India involving sale of its handset business to Microsoft. Reports suggest that Nokia might eventually resort to international arbitration to resolve the current dispute if an amicable settlement is not arrived at in a time-bound manner.
Analysing the above trend from a distance clearly indicates frustration and lack of confidence on the part of MNCs on the governments aggressive approach to fiscal matters and the inefficiency of the Indian judicial system to resolve such disputes timely.
What is also baffling is the trend where MNCs are seeking international arbitration either under BITs or under the international arbitration laws as against the domestic arbitration legislation. It appears that the Indian legislation does not have adequate teeth to provide necessary comfort to MNCs on such large disputes. The government needs to bring in appropriate amendments to ensure that the arbitration proceedings at least take place in India. The government should also take adequate steps to promote and institutionalise conciliation measures to amicably settle large tax disputes in a time-bound manner, which in many cases might be a better alternative as compared to arbitration. Outcome of conciliation measures should be made binding and irreversible by executive authority or courts except in specified circumstances.
The spate of retrospective amendments in 2012 have increased the level of uncertainty in tax legislation and devastated the confidence of foreign investors. With the formation of a stable government at the Centre, the corporate world looks forward to clarity and certainty in the tax laws and a credible, binding and efficient system for dispute resolution so that foreign investors are not compelled to resort to arbitration as a last resort.
(With inputs from Sujay Paul, director, Tax, KPMG in India)
The author is co-head of Tax, KPMG in India. Views are personal