|Taxman’s APA century|
|Tuesday, 27 September 2016 00:53|
103 transfer pricing pacts signal a welcome change
The taxman’s century when it comes to Advance Pricing Agreements (APAs) – since FY14, the Central Board of Direct has signed 103 APAs with assessee firms – is a sign of the growing maturity in handling international taxation disputes. Since the transfer-pricing disputes were essentially about the profit margins declared by MNCs – while they declared a 12% margin, say, the taxman said it should have been 22% – signing an APA means the firm and the taxman have agreed to a fixed profit margin which applies to older disputes, the present year as well as for future years; a total of 12 years of certainty has been provided according to the taxman’s press release on two of the APAs. The fact that 4 of these APAs are ‘bilateral’ means even foreign governments – two APAs each have been signed with the companies along with the governments of UK and Japan – accept the taxman’s formulation on how taxes are to be charged. That’s a sea change from the period when high-pitched assessments were the order of the day – between FY12 and FY15, the taxman added a whopping Rs 2.2 lakh crore to the incomes of MNCs and asked for back taxes based on this.
The companies involved included the likes of Microsoft, Vodafone and Shell and each order was fiercely litigated. While the taxman lost several cases including those of Vodafone and Shell – in these cases, the cash infusions into their Indian subsidiaries were treated as income to be taxed – the turning point came when the government decided it would not further litigate the Shell/Vodafone cases where there was an adverse judgment against the taxman by the Bombay High Court. While the APA scheme was first introduced in 2012, and the rollback provision – this allowed using the agreement to resolve old cases as well – in 2014, the scheme was slow to take off due to both assessees as well as the taxman being wary, and it didn’t help that the international tax division was short-staffed. But the government continued to push for APAs – the UPA changed the head of international taxation when US firms refused to deal with the incumbent and a committee was set up to recommend ideal profit margins in different sectors. The tide finally turned and over 700 requests for APA negotiation have been filed in the last four years across sectors like IT, banking and automobiles. While 100+ APAs is a record, the taxman’s success will be judged by how soon it is able to deal with the backlog, in the proportion of APAs that are ‘bilateral’ as opposed to the ‘unilateral’ ones and, of course, in ensuring the days of high transfer-pricing orders are a thing of the past.