India and the US have done well to finalise a framework to resolve long-pending transfer pricing disputes. Stitched up before US President Barack Obama’s visit, the solution ensures that an MNC is not taxed twice on the same income, and will get the due tax credit. It is a huge relief for taxpayers and also makes conciliation through the mutual agreement procedure (MAP), a preferred route available in bilateral tax treaties, to settle cross-border disputes.

Transfer pricing agreements mandate transactions between group companies to be priced at market rates. India’s tax office has raised hefty claims, especially on US software MNCs with operations here, alleging that they transferred profits to tax havens. India hasn’t got a penny so far as many companies contested their tax demands through MAP. The government will now get revenues, even if the amount is lower than the original tax demand. A time limit must be set to resolve MAP cases in future to ensure they don’t drag on. More important, the resolution opens a window for advance pricing arrangements (APAs) between the two countries, and that’s welcome. APA is an agreement between a taxpayer and the tax authority to compute transfer prices in advance. It lends certainty to MNCs about their tax liability and will help draw investments from US companies.

The government should also quickly make rules to align India’s transfer pricing regulation with best practices as promised in this year’s Budget. Faster resolution of all international tax disputes also calls for efficient functioning of the dispute resolution panel set up some years ago. India has joined the global effort to end aggressive tax planning by large companies. It should also make tax laws clear and simple to minimise disputes.