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US cos arms too can MAP tax disputes in India
November, 03rd 2007
Coca-Cola India, Reebok India and subsidiaries of other US multinationals will now be eligible to benefit from the India-US memorandum of understanding (MoU) setting up a dispute settlement process, called the mutual agreement procedure (MAP), under the bilateral tax treaty.

The Central Board of Direct Taxes has clarified that the benefit hitherto available only to US resident (the parent company) could now be availed of by the Indian resident entity (Indian subsidiary) if the company has opted for mutual agreement procedure (MAP).

MAP is essentially a dispute settlement mechanism provided under a double taxation avoidance agreement. Taxpayers of the participating countries can involve tax authorities from their respective countries to resolve any tax disputes. Under the provisions of the MoU, tax authorities keep disputed tax demands in abeyance, pending a decision through the MAP process, if a US resident taxpayer has a request under MAP under consideration of the authorities. However, the taxpayer has to furnish a bank guarantee of an amount equal to the amount of tax under dispute and interest accruing thereon as per the provisions of the Income-Tax Act.

Following CBDTs clarification, if an Indian subsidiary of a US company opts for MAP, any disputed tax demand would be kept under abeyance. Earlier, only the US resident entity could avail of this facility, if faced with a demand following a transfer pricing adjustment. The move follows references and representations from Indian residents seeking clarification on the applicability of the MoU entered into by both the countries in 2003. Experts say the move will give some relief to the outsourcing entities set up by US multinationals faced with transfer pricing demands.

This clarification will be helpful as there were instances where the MoU benefit was sought to be denied in India in respect of the demands raised as a result of transfer pricing adjustments made in the hands of the Indian entity for which the US resident invoked the MAP option, Deloitte Haskins & Sells partner Samir Gandhi said.
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