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MAP and bilateral APA agreements with US signal breakthrough for India

Mutual agreement procedures (MAPs) and advance pricing agreements (APA) between India and the US hint at closer ties between the two nations and reinforce India’s desire to be seen as an investor friendly country.

India and the US have reached an agreement on framework for resolving pending MAP cases in the technology (IT/ITeS) sector. The US has also agreed to accept bilateral APAs with India.

“This is a welcome step as US is India’s biggest trading partner and investor. Transfer pricing disputes are complex and resolving disputes via MAP and APA is the most efficient way because the normal appeal process in India is time consuming and uncertain,” said Manisha Gupta and Samir Gandhi of Deloitte India.

After over 18 months of talks between the IRS and Indian tax authorities, both sides have agreed on a broad framework to resolve over 100 pending MAP cases. Disputes which commenced as early as 2006 should now be resolved through these agreements.

History of doubt

A major concern for multinationals has been the mark-up and tax dues on costs for services provided. Instead of a fixed mark-up, the new MAP framework sets out the process for determining a mark-up based on the activities of the company.

“The past couple of years were marked by a halt in progress in relation to negotiation and resolution of bilateral tax disputes between India and the US. This has been the fall out of the reportedly inflexible approach adopted by India and a very strong reaction from their US counterparts,” said Arun Chhabra of Grant Thornton.

US multinationals have been frustrated by numerous transfer pricing disputes which started as early as 2006 and have been left unresolved. Many of the companies provided bank guarantees under the India US treaty but were unable to obtain double taxation relief.

“As a result, many US MNCs had to resort to litigation, which got them considerable relief at the tribunal level, but entailed invoking a parallel domestic dispute resolution process, that was quite prolonged, with the added rider that it may not provide them relief from double taxation,” said Suchint Majmudar of BMR Advisors.

Learning from previous experience

The framework follows lessons learned from Vodafone’s transfer pricing case where the Bombay High Court ruled a share sale could not be interpreted as income and therefore could not be taxed. Cairn India, Nokia and IBM are expected to be offered similar relief.

“In short, the framework does pave the way for a successful, “better late than never” resolution of many cases that had common sticking points,” said Majmudar.

The agreement between India and the US, aims to reach a common understanding over issues such as the interquartile range, choice of comparables and attribution of profits to permanent establishments.

“Based on this understanding, it is expected that the MAP process will make progress, with the idea being that by March 2015, the outstanding cases would be cleared,” said Majmudar.

India aims to secure investments and create a more stable tax environment with bilateral APAs with US companies.

With the US government’s approval, US companies will be able to agree their tax liability with India in advance, without any risk of losing tax credits at home.

“The recent meeting between the Indian and US competent authorities seems to have broken the stalemate. Better working ties between the two authorities will ensure that taxpayer confidence is restored in the treaty process, which is imperative for improving trade and investment between India and USA,” said Chhabra.

Positives for multinationals

Deciding on a new framework to resolve MAP cases comes as a huge source of relief for taxpayers and tax authorities alike.

“From a taxpayer standpoint, this will bring to a close the uncertain tax positions under FIN 48 that the taxpayers had been providing for. This will also enable them to attain double tax relief and close out several years in a row that have essentially the same issues involved,” said Majmudar.

Adopting international principles such as multiple year data and the interquartile range should allow for more reasonable outcomes for taxpayers in transfer pricing audits.

Both the MAP framework and bilateral APAs with the US are a welcome sign for multinationals that India is becoming more flexible and less aggressive in its transfer policies.

Benefits for India

India is taking important steps to distance itself from the negative perception that has surrounded its tax and regulatory environment and has been a huge for the investor community.

“A lot of US based taxpayers were a little wary of the APA regime in India given the reluctance of US competent authorities to negotiate with India. However, the announcement that the US will accept application for bilateral APA has raised hopes for expeditious resolution of transfer pricing disputes which is likely to change the outlook of a lot of US based taxpayers,” said Chhabra.

In creating a new MAP framework and introducing bilateral APAs with the US, India is moving towards a more stable tax environment. US multinationals dissuaded by previous experiences in India could now reconsider. Having closer ties with the US will increase taxpayer confidence in the Indian tax authorities and should boost investment in the country.

2015 appears to be a breakthrough year for India with regards to tax and transfer pricing disputes. First CBDT establishes a newly refurbished dispute resolution framework, then India’s first ever bilateral APA with a Japanese company is signed and now important agreements with the US over MAPs and bilateral APAs. These events should go a long way in improving India’s reputation.

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