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The U.S. tax authorities will begin accepting bilateral advance pricing agreements (bilateral APA) requests for India on February 16, strengthening ties between two governments in taxation of multi-nationals.
Multinational companies operating in India and the US would be the beneficiaries of this effort, as a bilateral APA could provide greater predictability in taxation, easing the uncertainty of doing business in both the countries.
As on date, India has entered into bilateral APAs with Japan (one) and United Kingdom (two). APAs are mainly of two types — unilateral and bilateral. A bilateral APA involves the tax administrations of both the countries and is more preferred by multinationals.
An APA is an agreement between a taxpayer and the tax authority concerning the transfer pricing method and the rate applicable to the taxpayers’ inter-company transactions, and normally covers multiple years.
This latest announcement of the US Internal Revenue Service (IRS) comes on the back of improved relations between the competent authorities of the two countries since September 2014. The biggest advantage of bilateral APAs are that the double taxation would get totally removed, S.P.Singh, Senior Director, Deloitte in India told BusinessLine while hailing the latest development.
The issues and methods covered by the bilateral APA are premised on an underlying competent authority resolution reached between say in this case the US competent authority and the Indian competent authority.
In January 2015, the U.S. and Indian competent authorities jointly announced that they had reached agreement on a framework for resolving longstanding competent authority cases involving Indian resident affiliates performing software development services and Information Technology enabled services.
In light of this agreement, the Advance Pricing and Mutual Agreement (APMA) office --representative office of the U.S. competent authority – started accepting requests in March 2015 for pre-filing conferences for bilateral APAs between US and India.
Rahul Mitra, National Head of BEPS & Tax Dispute Resolution, KPMG in India said “The US had been sceptical of India's ability to resolving transfer issues amicably because several MAP cases were held up. With the recent spate of MAP resolutions (about 100 cases), US seems to have gained confidence over Indian authorities ability to deal with issues on a non adversarial way, leading to the latest development on bilateral APA front.”
Meanwhile, Singh said there are many companies who had filed unilateral APAs with Indian authorities with an option to convert them into bilateral agreements once US tax authorities agree to accept bilateral requests. “I now expect many of them will convert into bilateral”, Singh said.
The Indian Government recently announced that more than 100 cases –out of the pending 200 past transfer pricing disputes between the two countries in the IT and ITES space—have been resolved, thanks to the landmark framework agreement signed in January 2015.
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