India Changes Position On Tackling Transfer Pricing Disputes

The tax department's decision to change its position in an important area of transfer pricing will benefit multi-national companies; especially those coming to India via important trade partners such as Italy, France and Germany.

The tax department will now allow transfer pricing disputes to be settled through Mutual Agreement Procedure (MAP) and Bilateral Advance Pricing Agreements (APA) even with treaty partners where specific provisions to this effect are absent.

Using a Bilateral APA or MAP, for inter-company transactions involving two countries, taxpayers can avoid double taxation by approaching the relevant competent authorities to agree to transfer pricing implications for the company.

So far, India did not permit MAP and Bilateral APAs with countries where the tax treaty did not have provisions of corresponding adjustment. Corresponding adjustment means that if a multi-national has paid tax in India owing to a transfer pricing adjustment, it will get credit on that from the tax authority of its resident country and vice versa.

Taxpayers prefer a bilateral negotiation instead of a unilateral one in case of disputes in international transfer pricing or to enter into an APA. The aim is rule out double taxation on either end, Rahul Mitra, national head of transfer pricing at KPMG India explained.

Until recently, MAPs and Bilateral APAs with Singapore and South Korea too weren't possible but the renegotiated tax treaties, effective April 1, 2017, with these countries inserted the provision on corresponding adjustment.

The tax department has today taken an extremely positive step in removing the self-inflicted embargo and this will prompt parties with pending unilateral APAs to change them to bilateral APAs, Mitra added.