India, US end three-year-old deadlock; to talk tax issues again

NEW DELHI: In a significant breakthrough ahead of Prime Minister Manmohan Singh's visit to the US next month, the two countries have decided to end their three-year old acrimony and restart negotiated tax settlements.

The peace moves have raised hopes of expeditious settlement of long-pending tax disputes involving a number of US multinationals in India, helping New Delhi send out a signal of non-adversarial tax regime and friendly investment climate.

In return, the US will recognise India's advance pricing agreements (APA), which will encourage more US-based companies to approach Indian tax authorities to know their potential tax liability in advance. The breakthrough was reached after three-day talks between the visiting US tax authorities and Indian tax officials last week.

"Talks were good...We have decided to move forward on mutual agreement procedure (MAP)," a senior finance ministry official told ET. Article 27 of the tax treaty between India and the US provides that a firm, which has suffered a potential double taxation, can seek relief through the competent authority under the MAP. Both the countries had successfully initiated MAP in 2010 but aggressive stance adopted later brought the popular dispute settlement mechanism to a standstill.

Several hundreds of crores are locked in tax demand in as many as 175 tax disputes involving US multinationals. But more than the amount the cases have generated perception of 'combative' tax authorities and hostile investment environment.

Royal Dutch Shell, Cadbury, Nokia, LG Electronics and Vodafone are some of the companies that are locked in tax dispute with Indian authorities.

Forty American business organisations had written to vice-president Joe Biden ahead of his India visit in July that Indian tax officials were imposing discriminatory taxes on US multinationals.

Aggressive stance adopted by both the countries over the last few years had led to acrimony and halted any progress on negotiated tax disputes in transfer pricing.

Finance minister P Chidambaram had promised a "stable and non-adversarial" tax regime soon after taking over and New Delhi's readiness now to move forward is seen as a positive development.

"This augurs well for resolution of long pending tax disputes....This will improve India's image as an investment destination...Bilateral advance pricing agreements if allowed would go a longway to even avoid disputes," said Rahul Garg, leader, direct tax, PwC.

Chidambaram during his visit to the US had carried out a reshuffle in the tax department and removed S K Mishra as competent authority, to send a signal that it wanted to turn a new leaf.

The US has also since changed its officials, marking a new beginning in the talks.

Transfer pricing refers to what related entities charge to each other in a cross-border transfer of goods, intangibles like brand or services. Transfer pricing rules try to check an MNC from shifting profits out of India. Tax administrations worldwide have become more aggressive lately in transfer pricing and India is no exception. 

Prashant Sharma

PGDM I sem