Income-tax department has set a target of 50 advance pricing agreements (APAs) to be sealed with multinational companies in the current fiscal that will exempt cross-border transactions by these firms from rigorous auditing to check income suppression.
Sources said the department, which has received over 500 applications from MNCs for signing APAs, was about to sign the next batch of agreements in June, but received requests from companies to extend the scope of such agreements to four previous years under the roll back provisions. The next batch of APAs would, thus, be applicable for five years prospectively and four years retrospectively from the date of signing. Under APAs, companies agree with the authorities on how to price their cross-border transactions. So far, India has signed six APAs.
The department is also pursuing with the US IRS some 200 tax disputes involving companies in the IT and ITeS sectors such as IBM and Microsoft for bilateral resolution. About 100 of these would be resolved by the end of the year. These disputes stem from India’s tax demands on MNCs alleging higher profits here than they have reported, leading to possible double taxation of their income here and in their home country.
India’s tax treaty with the US allows settlement of tax disputes involving double taxation through bilateral discussions. These disputes mainly relate to the profitability of contract research and development centres in India that serve MNCs. Cisco, Google, Honeywell, AT&T, Dell, Intel, Alcatel and Tesco are among the large multinational companies that run contract R&D centres in India.
The tax department’s claim of profit shifting by companies (called transfer pricing adjustments), had touched Rs 70,000 crore in the 2012-13 audit, but fell to Rs 47,000 crore in the 2014-15 audits. Experts said that the huge tax claim from the 2012-13 audit partly arose from officials questioning share valuation of certain transactions, which has not been repeated subsequently. Transfer pricing audits seek to identify alleged preferential pricing of transactions within group companies with the idea of getting profits taxed in the lowest tax country it is present in.
Past disputes arising from transfer pricing adjustments of about Rs 2.6 lakh crore that the department has made are still in litigation.