The high-pitched transfer pricing additions to the income of the MNCs, along with the 2012 retrospective tax amendments led to the coining of the term ‘tax terror’ for the Indian tax administration.
The high-pitched transfer pricing additions to the income of the MNCs, along with the 2012 retrospective tax amendments led to the coining of the term ‘tax terror’ for the Indian tax administration. The Advance Pricing Agreements (APAs) have taken the sting out of that, but the continuance of the Vodafone and Cairn retrospective tax cases is still a concern.
From a situation which appeared uncontrollable with the transfer pricing additions to the income of the MNCs between FY06 and FY15 adding up to a whopping Rs 2.64 lakh crore, which meant huge additional tax liabilities, the ways of handling taxation of international transaction of these companies within the related entities has now taken a complete U-turn, and the signing of 150 Advance Pricing Agreements (APAs) bear testimony to this.
With the Central Board of Direct Taxes (CBDT) signing 9 APAs in the last two days of the financial year (2016-17), the total number of such agreements has reached 152 — 11 Bilateral APAs and 141 Unilateral APAs. In 2016-17 itself, a total of 88 APAs (8 Bilateral APAs and 80 Unilateral APAs) were signed, including those with ‘some technological behemoths having major operations in India in the IT sector’, according to the department.
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The APA scheme, which gives certainty of tax calculation for a minimum of 5 years, was introduced in the 2012 Income-tax Act and the “Rollback” provisions were added to it in 2014 to extend the benefits also to the past four years – more than 800 APA applications have been filed in five years.
The APAs specify the methods of pricing and setting the prices of international transactions in advance, thereby removing the chances of any dispute between the tax department and the concerned company. While a unilateral APA is signed between the MNC and the Indian tax department, the bilateral ones also involve the MNCs’ country of residence.
Clearly, the pace of APA signing is a proof that the transfer pricing tax terror is a thing of the past now, but the government also needs to put an end to the Vodafone and Cairn retrospective tax cases to remove the ‘tax terror’ tag completely. Instead of looking at the possibilities of settling them through talks, better idea would be to ensure speedy arbitration and respect the arbitration award fully.