USA Opens Door to Bilateral APAs with India
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On February 1, 2016, officials from the Internal Revenue Service (the “Service”) released Internal Revenue Bulletin, IR-2016-13, announcing that beginning on February 16, 2016, the Advance Pricing and Mutual Agreement (“APMA”) office, a representative office of the United States competent authority, will begin accepting requests for bilateral advance pricing agreements (“bilateral APAs”) between the United States and India. In recognition of the importance of United States – India relations, Service officials maintain that the acceptance of these requests is an important step forward in strengthening ties between the two governments in the taxation of multinational enterprises.
Background and Details
In a move to resolve the numerous transfer pricing cases in dispute, the Central Board of Direct Taxes introduced an APA program in 2012 to provide greater certainty to multinational enterprises doing business in India. Initially, bilateral APAs between India and the United States were not accepted, and United States multinational enterprises with operations in India that sought certainty around United States - India transactions were limited to unilateral APAs. The absence of bilateral APAs between the United States and India competent authorities stemmed from disagreements on transfer pricing issues surrounding markups for services, location savings and marketing intangibles, among others. This lack of consensus on significant transfer pricing issues caused the backlog of competent authority cases to continue to build up without resolution.
Progress between the two countries in resolving these cases steadily increased over the years. In January 2015, the United States and Indian competent authorities jointly announced that they had developed a framework for resolving disputes involving the performance of information technology-enabled services or software development services by Indian-resident affiliates. In response to the development of this framework, APMA began accepting requests for pre-filing conferences, generally the first stage of the APA process, for bilateral APAs between the United States and India in March 2015.
Beginning this month, both competent authorities are now ready to accept requests for bilateral APAs covering transactions involving information technology-enabled services, software development services, or other issues in which transfer pricing principles are relevant. The acceptance of these requests will provide multinational enterprises doing business in these two countries with certainty around the transfer pricing methods used, appropriate adjustments and other critical assumptions.
The acceptance of bilateral APA requests between the United States and Indian tax authorities is a significant positive step towards providing greater certainty on historically contentious transfer pricing issues. The APA process can be costly and time-consuming; however, in certain situations, it presents an attractive alternative to audit appeals or litigation. Specifically, taxpayers need to consider the magnitude of their intercompany transactions in India; the impact of their Indian transfer pricing policy on other financial metrics such as cash flows; and the costs of double taxation and appeal/litigation in the event of a transfer pricing audit. Depending on the amounts involved and the other tax or financial goals of the company, the current and future benefits of an APA might justify the cost and effort spent in obtaining it.
How BDO Can Help
BDO USA, LLP can assist in determining whether a bilateral APA is the appropriate mechanism to address your particular transfer pricing and tax risks. Our professionals, through our U.S./India Tax Desk, have extensive experience guiding our clients through the APA process and in helping clients navigate through complex tax and transfer pricing issues arising in India.
For more information, please contact one of the following practice leaders: