tax authorities in signing bilateral APAs with India is New Delhi’s willingness to introduce a clause in such APAs for renegotiating profit margins and tax liability in India if the fortunes of a specific industry witness a sharp turn. That introduces flexibility to companies to lower the tax burden if profit margins fall, while the agreement broadly guarantees certainty about tax liability for five years.
“The automobile industry, for example, is going through a contraction in sales in Europe. If the critical assumptions used in arriving at the arm’s length price of a transaction between Indian and overseas units of an MNC change significantly, the proposed APAs could be renegotiated,” said a person privy to the development.
A change in the agreement could be resorted to if the operational profits of the Indian units either go up or down leading to a more than anticipated change in the tax liability in India. The US was earlier unwilling to enter into bilateral APAs with India saying it cannot accept the valuation US companies agree with India on their cross-border transactions with the Indian units.