Taxation issues are becoming more evolved and complex by the day. Diane Hay, special advisor on international taxation to PricewaterhouseCoopers in the UK has handled international taxation and transfer pricing issues for long. As UK Inland Revenue?s policy specialist on transfer pricing in the 1990s, she headed the first OECD working party revising the 1979 Transfer Pricing Guidelines and oversaw the introduction of profit-based methods. In an email interview with FE?s Tanu Pandey, Hay talks about various issues, the steps required and how she sees Indian taxation practice evolving. Excerpts:
Litigation cases on transfer pricing-related tax issues have been on a constant rise all over the world and India is no exception. How do you think this can be solved?
Litigation should always be the last resort for a transfer pricing dispute. Outside India, while there have been a number of important cases in courts over the last few years, very few cases are ultimately litigated. As far as the future is concerned, I think there are a number of actions that India could take. These include the introduction of safe harbours to tackle contentious areas and the introduction of advance pricing agreements that deal with transfer pricing issues before they become disputes. It would help if India developed its MAP programme further, working with other tax authorities to resolve cross-border disputes and eliminate problems of double taxation. I would also recommend that the Indian revenue department send some of its senior transfer pricing people to study best practices in other tax authorities (as in China) and that India endorses the new OECD transfer pricing guidelines.
There are not too many experts in transfer pricing. Do you think the government and the private sector should make an effort to train people in the field?
Given that India has only had transfer pricing rules since 2001, it has already come a long way and that too, very quickly. Expertise takes time to acquire and transfer pricing is no exception. Indian courts provide considerable guidance that should help drive a more correct and consistent approach to transfer pricing issues. As well as ensuring that TPOs have a reasonable tour of duty to build up their own experience, India needs to look outwards and study or bring in experience and good practice from other countries. This is increasingly important as India develops as a major economic power and Indian multinationals begin to operate across the world.
What is your estimate of the revenue blocked in transfer pricing-related disputes across the world?
While there are several sources with differing information on this matter, it is understandably a very difficult statistic to estimate with reasonable accuracy. Without endorsing any of these sources, I am quite sure that the amount of revenue blocked in transfer pricing litigation is significantly high, relative to the quantum of global trade.
How do you rate Indian tax authorities when it comes to international taxation issues, especially transfer pricing?
Transfer pricing in India has come a long way, very quickly, and in a very short time-span. Taking this into account, there is a steep learning curve for everyone, including tax authorities, professionals as well as the taxpayers. Tax authorities, while cautious in their approach, are learning the ropes of transfer pricing very quickly.
What are advance pricing agreements and how do these help in resolving transfer pricing issues?
An advance pricing agreement (APA) is simply a legal agreement between a tax authority and a taxpayer which enables transfer pricing issues to be agreed upon on a prospective basis. Many APAs are however, undertaken on a bilateral basis involving two (or possibly more) tax authorities, where there will be an agreement on how transfer pricing issues are to be resolved between the two tax authorities. These help because they can be crafted to find unique solutions to more complex situations and they provide the taxpayer with certainty of treatment, and, in the bilateral case, can eliminate the problem of double taxation.
MAP also helps resolve issues and reduce litigations in transfer pricing. India, as we understand, is at a very early stage with regard to MAP agreements with other nations. Do you think India?s adoption of MAP would be of help?
Yes, I think it would be very helpful. What is important in MAP is that the competent authority, which has the responsibility for MAP under India?s double tax treaties, has the understanding and experience of transfer pricing issues and also builds good working relationships with the competent authorities abroad. MAP works best where the competent authorities trust and respect one another and where there is a willingness to find pragmatic solutions within the principles laid down by OECD.
Are you looking forward to your visit to India? What are the specific issues that you would like to discuss during your visit?
I always enjoy being in India, it?s so vibrant and everyone is always so interested in what is going on. I am looking forward particularly to finding out what plans the Indian revenue department has for the introduction of advance pricing agreements and discussing what makes for a good APA programme. I?m also interested in learning how the new Dispute Resolution Panel is working, since this is an idea that may soon be introduced in the UK.