India and the US have solved over 100 transfer pricing disputes for sectors such as information technology (software development) services (ITS) and information technology-enabled services (ITeS) over 1 year period.
India signed the framework agreement with the US revenue authorities in January, 2015, seeking to resolve about 200 transfer pricing cases. The framework was finalized under the mutual agreement procedure (MAP) provision contained in the India-USA Double Taxation Avoidance Convention (DTAC).
The tax disputes arose after India's tax authorities made allegedly aggressive TP adjustments. These have now been amicably settled thanks to a bilateral framework agreement signed a year ago. What paved the way for the agreement was the provision of mutual agreement procedure (MAP) in the India-US Double Taxation Avoidance Convention.
Encouraged by the success of the framework, the US has opened the bilateral advance pricing agreement (APA) programme to India. Coupled with the growing trend of the Indian tax department signing (APAs) with MNCs' Indian units to avoid cross-border tax disputes - in all, 39 such treaties have already been signed.
How it will be beneficial?
• The success of the MAP mechanism would help allay MNCs' fears of high-pitched TP adjustments in India
• It will boost investor sentiment - especially for multinational companies and it is expected to pave the way for greater transfer pricing cooperation between the 2 countries, a development that is likely to enhance foreign investment flow.
• Combination of a robust APA programme and a streamlined MAP would be helpful in creating an environment of tax certainty and encourage MNCs to do business in India.
What is Transfer pricing?
• Transfer pricing is the practice of setting up prices for trading valuables between two entities across different tax jurisdictions. The valuables can be tangibles, intangibles, services and financial transactions and the entities can be company divisions and departments, or parent companies and its subsidiaries.
• Ideally, the parent company is supposed to buy/sell from its cross-border subsidiary on the same rate as it would have bought from an independent entity/external entity. This is technically known as" Arm-length's principle". Organization for Economic Co-operation and Development (OECD) endorses arm-length's principle for transfer pricing. Tax authorities followed suite and enforced MNCs to comply with the arm length's principle.
• Transfer pricing without arm length's principle is vulnerable to be misused by the companies to evade taxes by showing minimum profits in countries where taxes are high and maximum profits in countries where taxes are low.
What is Advance Pricing Agreement?
The APA scheme, introduced in the Income Tax Act in 2012, is aimed at providing certainty to taxpayers in the domain of transfer pricing by specifying the methods of pricing and setting the prices of international transactions in advance. These agreements allow MNC units to declare a value for their transactions with their Overseas Parents as per the rules prescribed by India and avoid audit or questioning by Indian authorities for 5 years. As for bilateral APAs, the tax authorities in the home country of the MNCs could accept the taxes paid in India by the Indian unit as valid business expenditure, negating the chances of double taxation.