The Indian government has recently issued guidance on procedural and technical aspects of the mutual agreement procedure. Amit Jain of EY and Ameet Kapoor of Ernst & Young LLP take us through the key detail and share their insights on the issues that have arisen in India with this procedure, and their resolution.
Doing business in India often entails tax controversy due to the frequent number of field audits. However, recent trends appear to indicate that audit frequency has declined, with a policy to move toward e-audits and other simplified procedures for taxpayers. At the same time, courts in over 70% of direct tax cases rule in favor of the taxpayer (Economic Survey 2017–18, Chapter 9, Volume 1), though it may take some years to resolve a dispute through the conventional court litigation route.
To this end, India has been able to successfully launch and use its advance pricing agreement (APA) and mutual agreement procedure (MAP) programs to help multinational enterprises (MNEs) achieve certainty and resolve disputes. This can be seen with over 300+ APAs signed until September 2019 (press release dated October 1, 2019 issued by Central Board of Direct Taxes (CBDT)) and over 153 MAPs resolved between 2016–17 (OECD, Making Dispute Resolution More Effective—MAP Peer Review Report, India (stage 1), Oct 2019).
Recently, to align with the Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action 14 Minimum Standard, the Indian government issued MAP rules in May 2020, and MAP guidance in August 2020 with respect to the MAP process and technical aspects.
In order to better understand the changes regarding MAP procedures and technical aspects, we had a conversation with Amit Jain, EY, EMEIA Global Tax Desk Leader, and Ameet Kapoor, from National Controversy Practice at Ernst & Young LLP, based in the U.S.
Q. What was the recent update in relation to MAP process and guidance in India?
Amit: This really goes back to the OECD peer review report (stage 1) relating to the implementation of BEPS minimum standard under Action 14 (Making Dispute Resolution Mechanisms More Effective), which covered India. Overall, the report concluded that India met only half of those standards. Some of the standards which were not met may need amendment to the double tax treaty possibly through the Multilateral Instrument (MLI). However, in order to address other areas, in the last few months, the Indian government has released two important changes with respect to MAPs.
In May 2020, the Indian MAP rules were amended with specific procedures for filing MAPs, and notification to the foreign competent authority. The rules also stated the aim to resolve MAPs within 24 months. Further, on August 7, 2020 the Indian apex tax administrator issued detailed guidance around procedural and technical aspects, acceptance/denial of MAPs, and the implementation of MAPs. Overall, there is now increased clarity on several aspects which were not previously addressed and developed out of practice.
Ameet: The recently released MAP guidance is relevant for many U.S.-based companies with operations in India. With transfer pricing (TP) audits remaining at high levels in India, companies should consider MAPs and/or bilateral APAs (BAPAs) as the primary dispute resolution medium, rather than going through the long appeals process in Indian courts. The MAP guidance reiterates the need for companies to be proactive, either through a BAPA or MAP.
In certain cases, access to MAPs in India is limited only to to asking the other jurisdiction (i.e. home country) for relief, as the guidance is clear India will not deviate from orders of the tax courts (i.e., Income Tax Appellate Tribunal) , or if a company signs a unilateral APA, or if the taxpayer elects to use a safe harbor, for example. Moreover, in India, if the tax court rules in favor of the taxpayer, the tax department can, and often does, appeal the ruling to the next level. This process can in some cases take many years to reach a resolution, whereas a MAP can be resolved in two to four years and eliminates the double tax risk.
The U.S. and Indian authorities have resolved more than 500 MAP cases over the last five to six years, making this a viable approach to resolve TP controversy. We also understand that there are more than 100 BAPAs pending before the two government authorities.
Q. For a foreign MNE, what does the domestic tax audit environment in India look like, and how do you achieve certainty/resolve disputes?
Amit: Historically the audit environment has been robust, but over the years the trend appears to have shifted to run fewer audits on focused issues. On August 13, 2020, the Indian government announced various measures for faceless audit and appeals, which will help to further simplify the audit procedures. At the same time, India has a robust court appeal mechanism although timelines to resolve disputes through the court process can be challenging. In my experience, companies have been able to use APAs and MAPs much more successfully to achieve certainty and resolve disputes without double taxation. The experience in Europe has been quite good with BAPAs signed with the U.K., Switzerland, Netherlands and Denmark. Also, there is an increase in MAP/APA filings for transactions between India and Germany, France and Italy respectively.
Ameet: I still feel that TP audits will continue to be an area of controversy, given the current economic conditions we are facing. Some U.S. companies, depending on their industry, have had to downsize in the U.S. while shifting more functions/activities to their India back offices, in some cases also revisiting the transfer price they are paying their Indian entities. These factors are expected to only increase audit scrutiny and the potential for TP adjustments. As Amit notes, APAs and MAPs, while also time-consuming and sometimes costly, are the preferred methods to manage double tax risks, as well as to achieve certainty.
Q. Coming back to the MAP rules and guidance issued recently, what are the key changes and are these in line with OECD/global guidance or practice?
Amit: One of the important amendments in the rules and reiterated in guidance is the endeavor to resolve MAPs in 24 months. This needs the right infrastructure in terms of team size to manage the timelines. Other guidance includes:
Overall, the guidance now documents various practices prevalent over the years and helps to achieve certainty.
Ameet: Yes, the guidance is a positive step to creating certainty. I think the guidance gives the taxpayer more to think about and to really consider bilateral mechanisms to manage double tax risks. For example, the U.S. Internal Revenue Service (IRS) has an audit campaign that is actively reviewing U.S. companies’ TP with their foreign captive service providers, whether it’s back office, research and development services or software development services. If a U.S. company’s Indian entity enters a unilateral advance pricing agreement (UAPA) with India, the IRS is made aware of the UAPA as result of BEPS Action Plan 5, which governs the exchange of information. If the IRS audits the TP per the campaign, it may not agree with the mark-up that was agreed to in the UAPA and can adjust the price.
In this scenario, the guidance is clear that India will allow access to a MAP. However, India will not engage in negotiations with the U.S., but rather will request that the IRS unilaterally provides double tax relief to the U.S. taxpayer. This could result in a potential roadblock to resolve the double taxation issue and may need some flexibility on both sides.
Q. Talking more on how the Indian APA/MAP program has been successful, could you share some insights on the issues and resolutions?
Amit: One of the most significant tax controversies in India is in relation to the remuneration for captive services entities in India. Both APAs and MAPs have had resolutions on the cost-plus results; depending on the type of services, this could be in the range of 12%–16%. Some of the MAPs resolved include issues around PE attribution, taxability of nonresident income where treaty relief is available, etc. Also, cases around deduction of royalty or management fee by Indian subsidiaries, which can result in substantial domestic litigation, have been resolved with reasonable resolutions including some BAPAs signed between India and the U.K. To conclude, MNEs should actively review their tax position, whether TP or otherwise, and where there may be potential controversy, take active steps to get certainty or resolve dispute through a bilateral mechanism, such as an APA or MAP.
Ameet: India’s APA office started receiving APA applications in 2012–2013. Now, I believe we are north of 1,000 applications in the system about seven years into their program (APA—Program of India—Annual Report (2018–19), CBDT, November 2019). BAPAs with the U.S. began in 2016, and we have seen U.S. companies across industries enter the program as they recognize that this is the best way to achieve certainty and to better manage reserves. Many companies have taken advantage of the combined MAP and BAPA process to clear 10 or more years of TP controversy. It is important to note that the same teams in both governments negotiate your MAP and BAPA cases and these are usually done simultaneously, so filing both applications around the same time is advisable.
The MAP guidance makes it clear that a BAPA helps to achieve certainty and to manage double tax exposure. The UAPA may increase scrutiny in the home country, and with India’s current position, to ask for correlative adjustment on the other side, the risk for double tax may remain. The same goes with litigating/appealing locally in the Indian courts. If the taxpayer has a negative Income Tax Appellate Tribunal ruling against it, the guidance makes it clear that again, the Indian competent authority will not be able to deviate from or negotiate that case, and so double tax risk is imminent. The guidance from India is the first step and this should evolve and develop as time passes.
Amit Jain is EMEIA Global Tax Desk Leader, EY, and Ameet Kapoor is Executive Director, National Controversy Practice at Ernst & Young LLP, based in the U.S.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
