Over the past 20 years, US-based multinational enterprises have made significant investments in India’s IT and back-office activities that support their business operations. Concurrently, India introduced formal transfer pricing rules in 2001 and began enforcement through annual audits.
While most US MNEs tried applying arm’s-length pricing in India, the local entities faced annual transfer pricing documentation requirements, detailed audits, and most likely significant transfer pricing adjustments. India’s tax authority has become more aggressive over the years, which has led to additional taxes on income already taxed in the US or other countries. In many cases, a significant portion of the tax has to be paid up front to appeal and litigate a case. While companies are able to win in litigation in many cases, the process can take more than 10 years to resolve.
These conditions led taxpayers to ask the India tax authority to initiate a formal advance pricing agreement program similar to those in the US and other countries. Initially, US–India bilateral APAs were not being considered by the IRS’ advance pricing and mutual agreement program. However, by 2016, taxpayers could file US–India bilateral APAs. MNEs then began filing for bilateral APAs to bring their transfer pricing issues into a forum where the US APMA program and the India tax authority could reach a fair resolution.
Based on the continuous, time-consuming, and aggressive audits, many US MNEs with India operations determined that it was necessary to move forward with filing bilateral APAs.
Status of US–India Bilateral APAs
Since 2016, more than 125 India–US bilateral and renewal APAs have been filed with the two governments, as taxpayers continue facing transfer pricing challenges. While approximately 20 US–India bilateral APAs have been resolved, more than 100 bilateral and renewal APA requests remain under consideration.
From 2016 to 2019, the two governments held numerous face-to-face meetings on APAs and performed joint site visits. This allowed both sides to resolve the initial bilateral APA. However, from 2020 to the summer of 2022, the two governments have been able to meet only by video or conference call. This has allowed only a handful of cases to be resolved and for a backlog to build. To the extent only a few bilateral APAs are resolved each year, it will be nearly impossible to clear the backlog of more than 100 bilateral APAs.
The backlog is causing companies with pending bilateral APAs to be audited for the years covered by the APA. India tax authority auditors are adjusting transfer pricing rules, and companies are being forced to make upfront tax payment that in all likelihood won’t be upheld in the bilateral APA negotiations. The adjustment puts additional pressure on the India tax authority to want to resolve the bilateral APAs with higher returns.
Additional Reasons to File for an India–US Bilateral APA
In addition, the OECD’s base erosion and profit shifting initiatives may cause India to become more aggressive in their transfer pricing claims for higher profits. This could make India’s transfer pricing even more onerous and lead to higher adjustment. While India asserts higher returns, the IRS is noting the returns earned by subsidiaries in India and other countries, and has initiated the captive services provider campaign to analyze such arrangements.
Excessive pricing for these services would inappropriately shift taxable income to these foreign entities and erode the US tax base. The goal of this campaign is to ensure that US MNEs are paying their captive service providers no more than arm’s-length prices. This potential for IRS adjustment is why obtaining a unilateral India APA makes no sense, as it likely will lead to double taxation—as part of the unilateral APA agreement in India, taxpayers waive their right to the mutual agreement process under the US–India Income Tax Treaty.
With increased pressure from the IRS, along with continued adjustments by the India tax authority, US MNEs with significant business operations in India are seeking bilateral APAs in an effort to achieve transfer pricing certainty. However, the governments need to focus on reaching agreements to shorten the length of time for an India–US bilateral APA. Unfortunately, some of the years covered by the APA request are now being audited and adjusted in India. The effect of these delays is that what was once an APA could invariably become a mutual agreement procedure request. Rather than have certainty on a prospective basis, the delays could cause taxpayers to be placed in a position where they are seeking post-assessment certainty.
An additional concern is that the India tax authority has changed positions throughout the process. The governments agreed at one point that only amortization being deducted as a tax expense would be considered a valid expense for reimbursement and markup. India is trying to obtain a markup on this type of expense and other imputed expense to increase taxable income in India. While there are challenges, large and growing US MNEs with significant India operations continue to seek India–US bilateral APAs.
The IRS’ APMA program traveled to India the week of Sept. 19 for joint site visits with the India APA and competent authority officials on six cases. The site visits, consistent with past visits, were designed to provide detailed information about the India operations to each government and were specifically not a negotiation of the APA terms.
The next step will be face-to-face negotiations of the bilateral APA cases at a meeting in India the week of Dec. 5. With more than 100 bilateral APAs pending, the upcoming negotiations between the two governments will be key to resolving a meaningful number of bilateral APAs for both governments. The IRS’ APMA India team has provided position papers to India on many of the APAs. Accordingly, there is an expectation that India will provide rebuttal position papers prior to the meeting or at least be prepared to discuss any cases where the site visit has been completed.
There are so many bilateral APA cases pending, and the upcoming meetings are the first in-person negotiations in over three years, which means now is the time for the governments to reach resolution. Taxpayers need certainty, or the APAs will no longer be applicable, as the APA years are being audited by India and the APAs will turn into mutual agreement procedure requests or result in litigation.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
E. Miller Williams is senior counsel at Eversheds Sutherland. He advises multinational corporate clients on complex transfer pricing matters, with an emphasis on international transfer pricing controversy, audits, advance pricing agreements, competent authority, and intercompany planning, structuring, implementation, and documentation.
Caroline Setliffe is a partner at Eversheds Sutherland. She represents multinational corporations in complex domestic and foreign tax controversies, with a special focus on treaty considerations and transfer pricing issues considering the latest OECD developments.
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