India and the US have resolved tax disputes of about R5,000 crore through bilateral advance pricing agreements (APA), the finance ministry said in a statement here on Thursday. The Central Board of Direct Taxes (CBDT) said the cases pertained to assessment years ranging from 1999-2000 to 2011-12. Further, during a meeting, the two countries also reached an agreement on the terms and conditions of the first-ever bilateral APA involving the two nations.
The APA scheme, introduced in the Income Tax Act in 2012, is aimed at providing certainty to taxpayers with regard to “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.
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 audits in India for their cross-border transactions.
“The proceedings involved extensive work on both sides and several discussions with the taxpayer. The successful conclusion of these cases will go a long way in building confidence of taxpayers who look to resolve complex cross border transfer pricing issues under a bilateral dialogue in order to obtain a comprehensive solution that is accepted by both the tax jurisdictions,” said Anuj Khorana, transfer pricing partner at EY. The global consultancy firm was involved in the first ever bilateral APA between India and the US.
What paved the way for the agreement was the provision of mutual agreement procedure (MAP) in the India-US Double Taxation Avoidance Convention.
“During the meeting, 66 MAP cases relating to transfer pricing issues and 42 MAP cases relating to treaty interpretation issues were agreed to be resolved successfully. The resolved cases pertain to various issues like transfer pricing adjustments made to the international transactions in the nature of payment of royalty, payment of management fees, cost contribution arrangements, engineering design services, contract R&D services, IT-enabled services (both BPO and KPO services) etc,” the CBDT said.
Some treaty interpretative issues in the nature of presence of permanent establishment in India and profit attribution to such PEs, disputes pertaining to royalty income v/s business income of foreign companies, etc were also resolved.