Unravelling of $10 billion stuck in tax disputes windfall for US

BENGALURU: US President Barack Obama's visit to India could help unlock over $10 billion stuck in tax disputes between India and various countries. The move will largely benefit American technology companies as a big chunk of the disputes involve software development and IT-enabled services (ITeS) sectors.

India's competent authority Akhilesh Ranjan and his US counterpart Douglas O'Donnell have agreed to resolve most of their outstanding mutual agreement procedure (MAP) cases related to transfer pricing. The meetings were held on January 15 and 16 in Delhi.
The money locked in transfer pricing adjustments for 2013-14 was a whopping Rs 59,602.63 crore for 1,920 transfer pricing cases, according to the finance ministry. More than 250 Indian MAP cases with the US date back to 2004-05. That number includes royalty and permanent establishment cases.

“There is well over $1 billion that the IT industry alone is currently fighting for in transfer pricing disputes. The discussions between the competent authorities can not only reduce the tax liabilities of these companies by thousands of crore but also set the right precedence,” said Kaushik Mukherjee, partner at PricewaterhouseCoopers.

Under the transfer pricing deal, both sides have also agreed to respect bilateral advance pricing arrangements. Bilateral advance pricing arrangements (APAs) would allow American companies to ascertain their tax liability in India beforehand. “Discussions between the two competent authorities is very welcome. It is coming after a long gap. This is only a starting point and needs to be taken to its logical conclusion,” said S P Singh, senior director at Deloitte. “A logical conclusion will be to apply the arrangement to even those companies who are not in the process but where there is a likelihood of litigation,” he added.

When a foreign company sets up its subsidiary in India, they need to maintain a minimum margin that needs to be charged to the parent company, over and above their cost of operations. What that margin will be, is the point of contention in transfer pricing disputes. Tax is paid to the government on this margin.

Nasscom believes a dialogue could kick-start the long-awaited guidelines on transfer pricing calculation. “Finance minister Arun Jaitley announced changes to transfer pricing in the previous budget, which was related to how the calculation will be done. If the government can notify those changes, it’ll be extremely helpful for the industry,” said Bishakha Bhattacharya, director, government relations and public policy, at Nasscom.