U.S. and India Reach Transfer Pricing Agreement

by: Smith and Howard

March 6, 2015

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U.S. and India reach transfer pricing agreement.

Competent Authorities for India and the United States struck a transfer pricing agreement that the Indian government hopes will boost foreign investment and ease concerns raised by its transfer pricing disputes with several companies.

In a related move, the Indian government decided against appealing the Bombay High Court’s (HC’s) transfer pricing decision in favor of Vodafone India Services (Vodafone) and ordered tax officials to apply the HC’s rationale to all similar transfer pricing disputes. India has long been associated with an aggressive tax policy and lengthy transfer pricing disputes.

The broad agreement reached between the U.S. and Indian Competent Authorities is aimed at resolving most of the two countries’ mutual agreement procedure (MAP) cases related to transfer pricing in the information technology / information technology-enabled services (IT/ITeS) sector.

Most tax treaties contain MAPs, under which taxpayers may request Competent Authority assistance when they believe that actions of the U.S., a treaty country, or both result or will result in taxation that is contrary to the provisions of a treaty.

Contentious issue

Transfer pricing has been a contentious issue in India in recent years, with the Indian tax department aggressively pursuing billions of dollars of tax claims. The Indian tax department was concerned that foreign companies have been underpricing goods or services provided by their Indian units so they could lower their taxes in India.

The issue in the Vodafone case was whether India’s transfer pricing provisions apply when shares are issued by a domestic company to an associated enterprise located outside the country. In particular, if an Indian company issued shares at lower than fair market value (FMV) to such an associated enterprise, do Indian tax authorities have the jurisdiction to tax the difference between the FMV and the issue price of the shares?

The HC concluded that India’s transfer pricing provisions may not be applied to tax a shortfall between the alleged FMV and the actual issue price of shares Vodafone issued to an affiliated Mauritius enterprise.

Signals of what may lie ahead

In announcing the transfer pricing accord, the U.S. and India Competent Authorities each issued statements.

Observers noted that India’s statement signals that the U.S. might start to recognize India’s advance pricing agreement (APA) program and begin accepting bilateral APA applications. This suggests, they say, that as many as 100 pending MAP cases for multiple years in the IT sector could be resolved within a few weeks.

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