Indian tax authorities are likely to soon sign their first bilateral advance-pricing agreements (APAs) with a clutch of Japanese trading companies. These agreements are designed to avoid conflicts with multinational companies (MNCs) over sharing of taxes between India and the countries where these firms are based.
After signing five unilateral APAs with MNCs to specify in advance the arm’s-length price in cross-border transactions, India is discussing 50 bilateral agreements involving companies and the tax administration of their respective countries of origin.
Tax officers often dispute pricing of transactions between related parties. For instance, tax department had claimed 87 million shares issued by Shell India to parent Shell Gas BV in 2008-09 at a face value of Rs 10 should have been valued at Rs 183. Bilateral APAs give certainty that the price declared using the agreed approach won’t be questioned in either of the countries concerned.
“About 15 bilateral APA applications are from the UK, 10 from Japan, and a few from Switzerland and other European countries. We are at advanced stages of talks in some of these. A Japanese delegation came here in April and an Indian one will go there next month. The first bilateral APA might be signed soon,” said a finance ministry official asking not to be named.
Bilateral APAs are likely to be signed in sectors like information technology, consumer electronics, telecommunications and manufacturing. General trading companies of Japan, called Sogo Shosha, are keen on finalising the agreements early so that their investments in India have tax certainty. Japanese companies, among the biggest investors here, have not shown interest in unilateral APAs.
“Bilateral is a better option because you get a full solution,” said Vijay Iyer, partner with consulting firm EY. One reason for the larger number of applications from Japan and the UK was that India was not permitting bilateral APAs from Germany, France, Singapore, Italy and South Korea, he added. According to Indian tax authorities, bilateral treaties with these countries do not facilitate bilateral APAs.
“Unlike European and US companies, which are ready to fight it out in court, the Japanese do not like disputes. It is not a litigant society,” explained another official.
While MNCs from the US have shown interest in unilateral APAs, there is hardly any application from American companies for bilateral ones. US authorities are not accepting applications for bilateral APAs because they think India is asking for a bigger tax share than it actually deserves. “Even if US taxpayers are keen on bilateral APAs, their authority is not accepting it. The US government protects its tax base very fiercely,” said another official asking not to be named.
The first five unilateral APAs were signed with companies in pharmaceuticals, telecommunications, exploration and financial services for a period up to 2018-19. These included international transactions involving interest payments, corporate guarantees, non-binding investment advisory services and contract manufacturing.
As the number of APA applications has already crossed 400 since its introduction in July 2012, the government is considering an increase in manpower of the APA authority. At present, there are 13 officers in the department negotiating APAs. The number might be increased to 25.
This will particularly help as the finance ministry has allowed rollback of APA provisions to past years. Rollbacks allow MNCs like Shell, Vodafone and Microsoft, which have received draft tax orders in recent years for purportedly suppressing their income, to resolve these cases under APAs. These agreements apply only to future transactions at present. So the taxpayer has to file an application before the beginning of the financial year for which the transactions are intended to be covered.
What is an advance-pricing agreement, or APA?
Pact between taxpayer and tax authority on method to compute arm’s-length price of transactions among group firms. Bilateral APAs involve a taxpayer, Indian tax authority and a foreign tax authority
India’s first set of bilateral APAs
Likely to be signed with Japanese trading companies; applications have also been received from British and Swiss firms
Are bilateral APAs better than unilateral ones?
Yes. Bilateral APAs provide full certainty over each country’s share in taxes if a group transaction takes place between an MNC based abroad and its Indian subsidiary
How does it address transfer-pricing woes?
In Budget 2014-15, the finance minister allowed rollback of APA provisions to past years and introduced a range concept to determine arm’s-length price to bring down transfer-pricing disputes.
Business Standard: July 22, 2014