India to ink 29 bilateral MNC tax deals in sign of softening stance

Aug 30 2013, 08:31 IST
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SummaryNew Delhi is set to sign bilateral deals with the tax authorities in the US, UK and Japan.

In what could shed India’s global image as being inflexible in cross-border tax negotiations, New Delhi is set to sign bilateral deals with the tax authorities in the US, UK and Japan, accepting corporate disclosures of profitability and tax liability of 29 MNCs without a question for five years, so long as these are computed on the basis of mutually agreed principles. The development signifies a major easing of tension between Indian tax authorities and their US counterparts, who had alleged that India’s approach to such deals was irrational.

These bilateral deals, gaining currency globally, are meant to avoid double taxation of MNCs, and are expected to reduce tax disputes in this area. The value of “transfer pricing adjustments” — jargon for the taxman telling corporations that their incomes are understated by a certain amount — rose to R70,000 crore from R45,000 crore the previous year, in what global analysts saw as reflecting Indian tax authorities’ unrelenting stance when it comes to taxation of cross-border transactions.

Last year, India had introduced rules for deals called Advance Pricing Agreements (APAs) with MNCs’ Indian units to avoid cross-border tax disputes. The APAs allow MNC units to declare a value for their transactions with their overseas parents as per the rules prescribed by India and avoid any audit or questioning by Indian authorities for five years. If the tax authorities in the home country of MNCs are also party to such agreements, they would accept the taxes paid in India by the Indian unit as a valid business expenditure and hence, that amount would not be treated as taxable income in the MNC’s home country, say the US, thus reducing the possibility of double taxation.

India was perceived to be reluctant to ‘give-and-take’ with authorities in other countries on sharing tax revenue, leading to initial pessimism about the APA mechanism’s efficacy.

Sources, however, said New Delhi would soon enter into 140 APAs, of which, 29 would be bilateral agreements on taxation of India units of MNCs incorporated in the US, Japan, UK and other EU members.

One of the reasons that has raised interest among businesses and other tax authorities in signing bilateral APAs with India is New Delhi’s willingness to introduce a clause in such APAs for renegotiating profit margins and tax liability in India if the fortunes of a specific industry witness a sharp turn. That introduces flexibility to companies to lower the tax burden if

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