At one point, when transfer pricing (TP) additions to the income of MNCs jumped from R45,000 crore in FY12 to R70,000 crore in FY13, few believed there was a solution to the taxman on a rampage. Within a short while of P Chidambaram taking over as the finance minister, however, things have begun to change, though the retrospective tax amendment remains an obvious problem—TP adjustments in FY14 are high at R60,000 crore, but down 14% over FY13. Safe harbour rules have been put in place, to ensure that if MNCs are to report certain minimum profit margins, they will be accepted as kosher. The concept of Advance Pricing Agreements (APAs) is also gaining ground, where the companies and the taxman agree on certain principles for valuing transactions. APAs are of two types, unilateral and bilateral—while the unilateral one is between the company and the Indian taxman, a bilateral APA includes the taxman of the country where the company is resident. The revenue department is set to conclude more than half a dozen unilateral APAs over the next few days of the 119 unilateral and 31 bilateral applications that it received.
While this is good news for long-suffering tax assessees, the advantage here is that the unilateral APAs can soon be converted into bilateral ones as well—this means the taxman in, say the US, will accept the tax payments made in India as valid expenses while taxing the company in the US. The first bilateral APA—with Japan—is likely to be concluded next month, though the real breakthrough will depend on how many bilateral APAs are signed with the US since it is with US firms that India has the most transfer pricing adjustments. About a hundred US firms have applied for a solution under the mutual agreement procedure (MAP) and discussions—that were stuck for a long time—between the taxmen of the two countries have been going along well. Since 70 of these 100 US firms have put in their applications for unilateral APAs, once the MAP process is over, converting these into bilateral APAs should be relatively easy. India’s taxman, once seen as one of the biggest hindrances to foreign investors, is in the process of an image change.