India and the US have reached a deal for the first bilateral advance pricing agreement, a move that will enable American firms to ascertain tax liabilities beforehand, Finance Minister Arun Jaitley said today.

India and the US have reached a deal for the first bilateral advance pricing agreement, a move that will enable American firms to ascertain tax liabilities beforehand, Finance Minister Arun Jaitley said today.

The two nations have resolved over 100 cases of tax disputes involving a tax of about Rs 5,000 crore through Mutual Agreement Procedure (MAP), he said.

Advance pricing provides certainty to taxpayers in respect of cross-border sales among related entities by specifying the methods of transfer pricing and determining the arm’s length price of international transactions in advance for usually a maximum of five years ahead.

MAP, under the Double Taxation Avoidance Agreement (DTAA), is an alternative dispute settlement mechanism available to authorities and foreign investors.

“India and the USA have reached an understanding at a recently concluded bilateral meeting between the competent authorities of the two countries to conclude the first bilateral APA between the two countries,” he said in a written reply to a question in the Lok Sabha here.

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The bilateral advanced pricing agreement (APA) to be entered into involves a multinational company of the US and its Indian subsidiary, he said without giving details.

“The agreement shall be for a period of five years from financial year 2013-14 to 2017-18 and the two competent authorities have decided the most appropriate transfer pricing methodology to price the international transactions between the two companies and have also decided the Arm’s Length Price (ALP) of the transactions,” he said.

Bilateral APAs between India and the US are expected to reduce the transfer pricing disputes that arise in respect of international transactions between related companies located in the two countries.

Also, they would lend certainty to international transactions between related companies of the two countries.

This, Jaitley said, would create a conducive environment for US-based multinational companies and attract foreign investment.

“Moreover, bilateral APAs would reduce the time and money spent on protracted litigation,” he said.

Finance Minister said India and the US have been resolving tax disputes under the Mutual Agreement Procedure (MAP) provision contained in the Double Taxation Avoidance Convention (DTAC) between the two countries.

In the last two years, more than 100 cases of tax disputes have been resolved under the MAP provision.

In a recent bilateral meeting between the two countries, another 108 cases of tax disputes have been agreed to be resolved, he said.

“While the total amount of income locked up in dispute prior to the recent meeting between the two countries was approximately Rs 12,000 crore, the recent agreement to resolve more than 100 disputes would reduce this amount by approximately Rs 5,000 crore,” he added.