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Multinational companies rush to seal tax pacts in advance
March, 31st 2014

Multinational companies have rushed to hammer out agreements that lock in their tax liabilities in India for the next five years through the Advance Pricing Agreement programme, putting behind their outrage over what's been perceived as the government's aggressive tax practices.

More than 240 companies have signed up for APAs for the next fiscal even before the first one is signed on Monday in a bid to avoid being saddled with demands that inevitably lead to long-drawn disputes.

"Response from companies in the second year also has been very encouraging... We have got about 240 applications," an income-tax official familiar with the development told ET.

An Advance Pricing Agreement, or APA, is essentially a negotiated deal between a taxpayer and the tax authorities that sets out beforehand the method for determining the transfer pricing pertaining to transactions between a subsidiary and its foreign parent. This relates to the pricing of assets, tangible and intangible, services, and funds that are transferred within an organisation in a cross- border transaction.

Multinational companies rush to seal tax pacts in advance Such transactions have been the source of much dispute in recent years, with tax authorities questioning and imposing taxes on big MNCs such as Vodafone and Nokia.

APA applications have originated from a wide range of sectors including IT and IT-enabled services (ITeS), financial services, pharmaceuticals and chemicals and deal with issues such as royalties, corporate guarantees, outsourcing and interest income.

In 2013-14, the first year of the APA rollout, 146 applications were filed. Tax authorities will sign five-six deals from the first lot of applications on Monday, an event being keenly followed by foreign investors.

The scheme, launched in the budget for 2012-13, is aimed at providing certainty to foreign taxpayers. The agreement will shield a company from future questions from tax authorities, litigation and compliance burden for a period of five years once an agreement is reached.

The programme has been watched very carefully the world over after India's increased aggression on tax issues attracted wide condemnation.

High-profile cases involving Shell and Microsoft saw thousands of crores in transfer pricing adjustments being disputed with a number of these cases landing up in court. India was said to be the third most-litigious country in respect of transfer pricing in a Grant Thornton report.

Tax experts said India's quick response on APA proposals has been commendable.

"India's APA programme has done better than many countries as we have been very swift in handling applications," said Vijay Iyer, partner and national leader, transfer pricing, EY.

The new government that takes over after the election should support the programme to boost foreign investment, said Sabine Wahl, director, PwC.

"The programme has been handled very professionally. APA authorities have clearly shown that it's a collaborative relationship between taxpayers and tax authorities, added " said Wahl.

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