A pragmatic way to settle tax disputes

Tax authorities in India and the US have done well to firm up a framework for negotiated settlement of tax disputes. A pragmatic approach will help resolve more than 100 tax disputes involving subsidiaries of MNCs facing tax claims in India. This will renew investor confidence in India. The tax treaty between India and the US allows for conciliation through the mutual agreement procedure.

MAP, in theory, is an effective way to settle disputes: a resolution between the two governments ensures that a company is not taxed twice on the same income. But MNCs will go for MAP only if the resolution is speedy. So, atime-limit will motivate more companies to go for MAP.

How flexible should India be in settling MAP cases, even if the government wants to collect its dues? That mainly depends on whether the goal of attracting foreign investment is paramount. Still, tax authorities should be fair-minded as MAP is based on good faith. Moreover, once a negotiated settlement is reached, the dispute can be withdrawn from the formal legal process, easing the burden on our judicial system. The income-tax law too provides for other ways to settle crossborder disputes, most of which relate to transfer pricing assessments.

The dispute resolution panel (DRP) is one among them. The tax department must ensure robust functioning of the DRP by deploying full-time members. Investors should also be encouraged to have advance pricing arrangements, in which taxpayers and tax authorities compute transfer prices in advance. This is global good practice and adds to investor certainty about doing business in India.

MNCs often use transfer prices to shift their profits to tax havens. They do so to escape paying taxes in countries having high-tax regimes with complex rules that make it tough for potential investors to compare post-tax returns across investee countries. But there are ways to make it tougher for MNCs to inflict “base erosion and profit shifting” on their host nations. The answer is for these countries to move towards low and simple tax regimes. India should do the same to end tax disputes.