Scores of US-based tech biggies have reduced their tax liabilities in India as New Delhi and the US resolved as many as 100 pending tax disputes involving India-incorporated associates of these firms in the last one year without resort to litigation.
Although a comprehensive list of companies that benefited from the development could not be immediately drawn up, IT majors like Microsoft, IBM, Google, Cisco, Honeywell, AT&T, Dell, Intel and Alcatel had in the past been subjected to transfer-pricing (TP) audits in India for their cross-border transactions.
The tax disputes arose after India’s tax authorities made allegedly aggressive TP adjustments; these have now been amicably settled thanks to a bilateral framework agreement signed a year ago. What paved the way for the agreement was the provision of mutual agreement procedure (MAP) in the India-US Double Taxation Avoidance Convention.
Coupled with the growing trend of the Indian tax department signing (APAs) with MNCs’ Indian units to avoid cross-border tax disputes — in all, 39 such treaties have already been signed — and the interest shown by the US and some other countries to sign bilateral (government-to-government) APAs with India, the success of the MAP mechanism would help allay MNCs’ fears of high-pitched TP adjustments in India, analysts said.
The current MAP agreement targets to settle a total 200 cases — all relating to the disputes over the values ascribed by the Indian tax department to the past cross-border transactions of these MNCs’ associates in India. TP adjustments typically revise the income of these companies in India upwards; the result is higher tax claims.
“The MAP programmes with other countries like Japan and 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 program- me would be helpful in creating an environment of tax certainty and encourage MNCs to do business in India,” the revenue department said in a statement issued on Thursday.
“Resolution of almost 50% of the MAP disputes in a span of one year from the framework agreement with the US revenue authorities and opening of bilateral APA shows the commitment of the authorities not only to speedily resolve the past issues but also pave the way for a non-adversarial tax regime leading to ease of doing business in India. We understand that competent UK authority will be India during the first week of February wherein resolution of certain MAP cases with UK is expected,” said Nitin Jain, tax partner, transfer pricing group, EY.
The APA scheme, introduced in the Income Tax Act in 2012, is aimed at providing certainty to taxpayers in the domain of transfer pricing by specifying the methods of pricing and setting the prices of international transactions in advance. These agreements allow MNC units to declare a value for their transactions with their overseas parents as per the rules prescribed by India and avoid audit or questioning by Indian authorities for five years. As for bilateral APAs, the tax authorities in the home country of the MNCs could accept the taxes paid in India by the Indian unit as a valid business expenditure, negating the chances of double taxation.
The profitability of contract research and development centres set up in India by global IT and IT-enabled services firms has been a major area of dispute between them and the Indian tax department. On the basis of its internal benchmarks of industry averages and median industry price, the department demanded higher taxes by ascribing higher profitability to such units. It had, for instance, attributed about 30-40% profitability to contract research units, while the firms claimed to have eked out much less. The higher estimates of profit margin allowed the taxman to revise upwards the value of the service rendered by the captive Indian units to its overseas parent, in what could inflate the tax liabilities of these units.
According to Samir Gandhi, partner, Deloitte Haskins & Sells, “With satisfactory resolution of IT and 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. The settlement will cover outsourcing units of the US-based companies which are mainly present in IT and ITeS sectors in India.”
The outcome of MAP settlement on how much tax should be levied in each country on a specific transaction is, however, not binding on the taxpayer. If the taxpayer accepts the outcome, the solution becomes binding on both it and the tax authorities.
Resolving transfer pricing disputes was one of the primary agendas put on the table by US President Barack Obama when he met Prime Minister Narendra Modi last year here. A slew of US-based companies had petitioned to the White House to help them seek resolution of the long-pending disputes in India.
“MAP resolution can be made more efficient by inserting Article 9(2) in tax treaties with Germany, France, Singapore and South Korea as presently the position is that MAP settlements can’t be made with these counties which are also one of India’s largest trading partner and investors. MAP/APA is the most efficient option of resolution of transfer proving disputes as normal litigation process is time consuming and uncertain.
This will certainly increase the confidence of doing business in India and will send much needed assurance to foreign investors,” explained Gandhi of Deloitte.