APA, MAP results must help clean up the mess
The first Advance Pricing Agreement (APA) with rollback provisions, signed by the revenue department this week, will go a long way in resolving the disputes over the high-pitched transfer-pricing (TP) adjustments over the years, totalling Rs 2.64 lakh crore since FY06. The APAs between a company and the taxman fix a framework for taxation of international transactions within group entities for at least five years—India has signed 14 APAs (13 unilateral and one bilateral) including this one—the advantage of the rollback provision is that it covers four years preceding the signing. So, such APAs will provide certainty in tax treatment for nine years and would mean settlement of disputes in the past years covered by it. While the success of this window depends on how many such APAs are signed, the real challenge is to turn unilateral APAs into bilateral ones—by the end of 2014, the department had received 329 unilateral and 57 bilateral applications. Unilateral APAs are signed between Indian revenue authorities and the concerned company and there is no guarantee that the tax department of its home country will accept the treatment outlined in the agreement; whereas, bilateral APAs are a tripartite agreement involving the country of residence of the company. Getting into the bilateral pacts has been difficult in the past, especially in the case of US IT and ITeS companies; about 200 such transfer-pricing cases, including those of big IT MNCs like IBM and Microsoft, have been pending resolution under the mutual agreement procedure (MAP), because the revenue authorities of the two countries didn’t agree on the rates to be applied.
While Indian authorities insisted on 18-19% profit margins, the US wanted it to be 12-13%. But, the good news is that the two countries have finally signed a framework for solving these cases—35 cases have already been resolved and 100 others are expected to be resolved in the next three months. As a result, US companies will be able to sign bilateral agreements with India now, and a similar exercise is now on with the UK and the Japanese authorities. The government’s decision not to appeal against the Bombay High Court judgement in the Vodafone and Shell transfer-pricing cases in the Supreme Court did indicate that it is serious about clearing the TP mess, but it is yet to be reflected in the additions made to the MNCs’ income. Now, the next round of TP audit is due in the next few months and the successes on the APA and the US MAP fronts must reflect in the fresh orders and also handling of the past cases.