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India may sign transfer pricing pacts with Japan, UK
May, 15th 2014

To minimize transfer pricing disputes, the Indian tax department is likely to sign advance pricing agreements with Japan and the UK in the next few weeks.

This would give Japanese and British multinational companies the advantage of claiming tax relief in their home country for adjustments made by the Indian tax authorities, thus eliminating the possibility of double taxation.

An advance pricing agreement is an accord between a taxpayer and the tax department on a transfer pricing procedure for a particular set of transactions. Transfer pricing is the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.

Transfer pricing has been an area of increasing dispute in India with the most recent assessment of such pricing by the tax department seeing increased claims of more than $9.5 billion.

An advance pricing agreement could be between a company and tax authorities or with a foreign country or a group of nations. Agreements with other countries depend on the tax treaties India has with them.

Advance pricing agreement rules were notified in August 2012 as the Indian tax authorities sought to reduce long-drawn litigation in transfer-pricing and provide some certainty to multinational companies operating in India.

“We are in talks with a few countries. But it is a long process and involves negotiations with revenue authorities of the other countries,” an income tax official said, requesting anonymity. “We will be signing a few bilateral agreements soon.”

For an agreement with a nation, tax authorities of both countries share position papers outlining their stance and then meet to iron out differences.

The tax department has around 400 advance pricing agreement applications pending with it, a majority of which are in regard to specific companies.

Although a move toward agreements with nations is a sign of maturity of the Indian tax department, it will have to ensure that similar agreements are signed with the US, South Korea and other European countries to benefit the majority of the multinational firms, experts say.

India is finalizing changes in the South Korean double taxation avoidance agreement (DTAA), but similar changes are unlikely in India’s agreements with France, Germany and Singapore due to differences between revenue authorities over the scope of the DTAA to enter such pacts.

Advance pricing agreements with nations will be beneficial for multinational companies, according to Vijay Iyer, partner and national leader, transfer pricing, at EY, a consulting firm earlier known as Ernst and Young.

“If the Indian tax department makes a transfer pricing adjustment on a subsidiary in India, the parent company can endeavour to seek relief from the other country’s tax authority,” Iyer said.

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