Indo-US tax talks stuck on acceptable profit margins

Apr 10 2014, 01:31 IST
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For the US taxman, the payments made by a US company to its Indian subsidiary is a business expense. For the US taxman, the payments made by a US company to its Indian subsidiary is a business expense.
SummaryUS pushes for 12-13% levels, Indian taxman reluctant to go below 18%.

the higher margins, analysts said. In fact, under the safe harbour rules (SHR), the 20-30% margins have forced the majority of the companies to be out of it and therefore, only 30 applications were filed for the same in FY14, the first year of SHR.

The Rangachary panel – SHR rates were fixed based on its recommendations – found that while IT companies were quoting profit margins of 15%, TP officials thought they should be as high as 24%. The panel finally settled for a 20% SHR but this is too high to gain traction. Similarly, in the ITeS sector, while companies with a turnover of under Rs 500 crore were quoting margins of 15%, the transfer pricing officers wanted an average of 26% and the panel, again, recommended 20%.

In case of contract R&D in the IT sector, the Rangachary panel took a middle path by fixing 30% as profit margin – to balance the base rate of 20% and profit margins of some of the companies as high as 50-60%.

The Indo-US MAP negotiations had got stuck with the US side pressing for the removal of SK Mishra, joint secretary in charge of the international tax division, and talks resumed only after he was replaced by Akhilesh Ranjan on July 10 last year, when finance minister P Chidambaram was visiting the US to woo investors.

As per the strategy firmed up by the Indian side, of the 100-plus US firms including Microsoft which have filed for a solution under MAP for past cases, around 70 have now filed for unilateral advance pricing agreements (APAs), which detail how various expenditures and income are to be treated by the tax authorities for a (future) period of five years.

But these are unilateral APAs, which are not recognised by the US. The idea is to turn them into bilateral APAs so that they get a deduction in the US for the tax paid in India.

For this to happen, both the sides will have to first agree on the TP rate. “The Indian side will have to find a solution. Probably, the way forward could be to tackle the existing cases at a higher rate and new cases at the rate closer to what the US wants,” said the official quoted earlier.

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