Cairn & Vodafone tell a sad story, APAs a happy one
A few years ago, though not individually as high-profile as the retrospective Vodafone and Cairn tax cases, transfer-pricing cases were multiplying so fast, they even threatened Indo-US relations—so much so that US tax authorities refused to even deal with their Indian counterparts and a solution was found only after then finance minister P Chidambaram transferred SK Mishra who headed the international taxation division. Between FY12 and FY15, over R2.2 lakh crore were added, by way of transfer-pricing orders, to the income of MNCs operating out of India. Not only have such high-pitched orders now stopped, considerable progress has been made in resolving older cases and, most important, the taxman and MNCs have negotiated clear rules on how various transactions are to be valued through what are called Advance Pricing Agreements (APAs). Cases pertaining to US-based MNCs were tackled through the Mutual Agreement Procedure (MAP), and the Indo-US MAP meeting in Washington in the last week of October, saw resolution of 66 cases relating to transfer-pricing issues and 42 cases relating to the Treaty Interpretation; the cases which related to assessment years between 1999-2000 and 2011-12 add up to over R5,000 crore. That the cases resolved belong to diverse areas from engineering design services to contract R&D, marketing support and IT-enabled services and even cases of ‘permanent establishment’ show the handling of transfer pricing cases have attained considerable maturity.
Going forward, the taxman’s real challenge would be to conclude as many bi-lateral APAs as possible in the next few years—while unilateral APAs are pacts between the Indian revenue authorities and MNCs, bilateral ones involve revenue authorities of the MNCs’ resident country and are more tricky; they are far more rewarding since this means the MNC gets the same tax treatment at home also, and makes overseas investment that much more attractive. This is why the Indo-US authorities also discussed ways to expedite bilateral APAs, besides agreeing to the terms and conditions for the first such APA. The fact that, after a slow start, the Central Board of Direct Taxes (CBDT) has succeeded in signing 111 APAs out of the 700 applications—this includes seven bilateral APAs, five with the UK and one with Japan—has infused a lot of confidence among the foreign companies. Sadly, the great progress in APAs has not been replicated in the case of the two big retrospective amendment cases, Vodafone and Cairn. While that could partly be due to the very intense public and political focus on these cases, the fact that the government is not even willing to agree that they can be dealt with under the Bilateral Investment Treaties with various countries is surely a factor—after all, if the government had not agreed to work with the US government on resolving disputes as per a MAP, there would have been no progress on the transfer pricing cases either.