Whether it is the retrospective tax cases like Vodafone or Cairn Energy, or the Rs 2.64 lakh crore of transfer-pricing adjustments made to the incomes of various MNC operations in the country between FY06 and FY15, the Indian taxman has always been seen as adversarial. Indeed, when the transfer-pricing adjustments for US-based MNCs were at their highest during the UPA years, at one point, the US government refused to even attend meetings conducted by the Indian side—to resolve the impasse, the government even replaced the then head of the international taxation division. Much water appears to have flown under that bridge since, as the first annual report of the Advance Pricing Agreement (APA) suggests, the US tops the list of countries with whom such agreements have been signed. As opposed to litigation over how various items of a company’s revenue—such as, say, royalty payments—are to be taxed, under an APA, the company and the Indian taxman sign a negotiated settlement. While the APA itself is valid for five years, many also have a rollback provision which allows the same principles to be applied to transactions of the previous four years as well, thereby putting a quick end to a lot of disputes. If the APA is also agreed to by the taxman of the country from where the firm is located, it is called a bilateral APA—so, if the US government is party to an APA India has signed with, say, Microsoft, it too will give Microsoft a tax break for what it pays to the Indian taxman.
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While 815 applications for APAs have been filed in the last five years since India began the process—706 of these were for unilateral APAs—the taxman has already signed 152 APAs, of which 11 were bilateral. That the number jumped from five in FY14 and four in FY15 to 55 in FY16 and 88 in FY17 shows the speed at which this work is progressing. Contrast this with China which concluded 113 APAs in 10 years between 2005 and 2014—while China signed roughly one APA every month, India has been signing more than 2.5. The US, the annual report on APAs tells us, takes an average of 34 months in signing unilateral APAs and 51 months for the bilateral APAs as compared to India’s 29 months and 39 months, respectively. With the signed APAs stretching across 118 countries and across 29 different type of transactions and across 20 types of industry, India’s APAs have clearly come of age. In one case, the Indian branch declared more than Rs 5,000 crore as additional income after entering into an APA—that means over Rs 1,500 crore of tax without any litigation or furore. Apart from applying this to ‘safe harbour’ provisions for MNCs that are not covered by APAs, the non-adversarial approach has to be extended to other areas of taxation as well.