Advance pricing agreements to draw investments from US companies

US MNCs such as Lockheed Martin, Google and Dell might soon be able to get a fix on their tax liability in advance, sans any fear of losing tax credits back home, with the American government agreeing to bilateral advance pricing agreements (APAs).

Over 150 US companies have applied to Indian tax authorities to sign APAs. But these applications are unilateral in nature as they did not so far involve the US tax authorities.

 The US government’s backing for the programme is expected to help India draw big-ticket American investments, particularly in defence, for which agreements were signed between the two countries on Sunday.

India is very keen on securing investments in defence as part of the Modi government’s plan to kickstart manufacturing. In fact, soon after taking office, the Modi regime had raised FDI in defence sector to 49%.

“Most of the applications are for unilateral APAs. But since agreements are yet to be signed, these can be converted to bilateral ones,” said a government official privy to the development.

India has received 378 applications for APAs so far and a large chunk of these are from American companies looking to mitigate tax-related problems.

These companies would be able to get a clear idea of how Indian tax authorities would apply transfer pricing parameters on key transactions, an issue that has caused much concern among international investors.

An APA allows a company to ascertain tax liabilities ahead of time and not be surprised later, which is in line with Finance Minister Arun Jaitley’s commitment to reverse the perception that Indian tax authorities are excessively aggressive.

“Bilateral APAs, if implemented expeditiously, would give investors certainty of tax outcomes on inter-company transactions without having to go through litigation,” said Rahul Garg, leader, direct tax, PwC.

Many of the disputes in the recent past have been over application of transfer pricing rules by tax authorities, earning India the reputation of an adversarial tax jurisdiction.

Transfer pricing rules are applied to financial transactions between the arms of a MNC.

As part of the wide-ranging reset of India-US economic ties after the Modi administration assumed office, both sides have also struck a deal with regard to resolution of past transfer pricing cases, some of them pending for over five years.

Under an alternate dispute resolution mechanism known as MAP, or mutual agreement procedure, present in the India-US tax treaty, the competent authorities in both countries will be able to negotiate a settlement that’s acceptable to both.

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