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Good start to resolving transfer pricing row with US
February, 03rd 2016

Last year, when the Bombay High Court ruled against the taxman in two TP cases against Vodafone and Shell, the government decided it would not appeal the cases – an attempt to reassure investors of the government’s intentions. (Reuters)

Though the use of the retrospective tax on Vodafone and Cairn tend to grab the headlines, a large part of the ‘tax terror’ in India has really been the contribution of the high-pitched transfer pricing (TP) additions to the income of the MNCs like IBM, Microsoft, Vodafone, Shell and even a Maruti Suzuki on account of all sorts of spending, ranging from the value created by R&D done in India to, if you please, excessive (according to the taxman, that is) advertisement expenses. The situation became so bad, the TP additions between FY06 and FY15 added up to a whopping Rs 2.64 lakh crore. Combined with the retrospective tax that is still not off the tax statute, it is hardly surprising that ‘tax terror’ is still top of the mind for most foreign investors. The good news is that there has been some progress on TP and this is now beginning to yield results. In the last year of the UPA government, for instance, then finance minister P Chidambaram removed the tax official handling international taxation when the US government said it would not deal with him. A committee was set up to provide ‘safe harbor’ guidelines, to indicate that if MNC arms showed a certain type of profitability, the taxman would not apply TP norms to them; several guidelines were issued to help guide the taxman and to ensure TP adjustments were made after a great deal of deliberation and by senior tax officials, not just the assessing officer. It was also agreed that once the firm and the taxman signed an advance pricing agreement (APA) which would clearly state the tax treatment for different types of expenditure/profit, this would be applied even to the existing tax disputes. Last year, when the Bombay High Court ruled against the taxman in two TP cases against Vodafone and Shell, the government decided it would not appeal the cases – an attempt to reassure investors of the government’s intentions.

According to the Central Board of Direct Taxes (CBDT), the landmark Framework Agreement signed with the revenue authorities of the US in January 2015 to set out a Mutually Agreed Procedure (MAP) to resolve about 200 TP disputes between firms in the two countries has already helped in solving 100 cases, and more such cases will be resolved before the end of this fiscal. Besides solving the existing cases, the biggest advantage of this agreement is that it opens the door for bilateral advance pricing agreements (APAs) as well – this means the Indian and US taxmen will now agree on what expenses will be allowed or disallowed, as a result of which US firms can get a full set off against taxes paid in India. With similar MAP agreements with other countries like Japan and the UK also in the offing, resolution of past disputes with the companies in these countries can also be expedited. Though it is too early to say all the TP troubles of MNCs are a thing of the past, the MAP resolution is a big step. If finance minister Arun Jaitley combines this with the scrapping of the 2012 retrospective tax amendments in the upcoming budget, as indicated by prime minister Narendra Modi, it will go a long way in fulfilling the promise of ending tax terror and improving the ease of doing business in the country.

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