A key proposal from the Direct Tax Code introduced last year to bring tax certainty and to reduce litigation on multinationals’ cross-border transactions –Direct Tax Code (APA) scheme – has failed to win the confidence of tax authorities in other countries due to the apparent rigidity of Indian tax administration focused on meeting revenue targets in a difficult year.
Acceptance of Indian rules by other countries on the ‘arms length price’ at which India will permit trade to take place between domestic and foreign arms of an MNC (called transfer price) is essential to avoid double taxation. That is because tax authorities in all countries where an MNC has presence, would try to attribute maximum profits of the group in their jurisdiction to protect their tax base.
US officials have now made it clear that they would not accept an Advance Pricing Agreement between a US company and the Indian authorities.
India’s APA rules introduced last August had promised multinationals that the revenue department will not ask them to revise up prices of cross-border transactions for five years if they complied with the terms of the Agreement on the principles of arms length pricing.
Overseas reports said quoting Michael Danilack, Deputy Commissioner (International), IRS Large Business and International Division, at a conference last week that India’s tax examination process was “irrational.”
U.S. companies should not pursue bilateral APAs based on what has so far been heard about the Indian APA rules, Danilack was quoted as saying in a biting criticism of the Indian rules.
The U.S. has no intention of accepting an Indian APA on its side, which is necessary for one to proceed, he was quoted as saying.
There are already hundreds of double taxation related disputes involving India and the US. Three leading experts in India FE talked to, agreed with the sentiments expressed by the US official but declined to be quoted.
There is no reason for a multinational to enter into an APA with Indian authorities if another country where it may be liable to pay tax will not honour such a deal. This development coincides with a flurry of tax notices sent to companies like Vodafone and Shell India invoking transfer pricing rules saying shares issued to overseas group companies or parents were underpriced.
Transfer pricing rules are invoked on financial transactions too but rarely on those in the nature of capital inflows.
Shell India stated last