NEW DELHI: Tax authorities in India and the US have over the past few months finalised a framework for negotiated settlements that will enable the resolution of more than 100 tax disputes involving subsidiaries of American multinationals such as IBM, Oracle and Microsoft facing tax claims of millions of dollars, unaffected by the recent furore over the perceived mistreatment of a diplomat in New York.
The resolution of these disputes, some of them pending for three years or so, could come as early as February, a finance ministry official said. The government hopes this will send a strong signal to global investors about India’s intent to provide a tax-friendly administration, especially after earlier retroactive changes led to some amount of disaffection.
“We have finalised the broad contours for MAP (mutual agreement procedure) with the US,” the official, who did not want to be identified, told ET.
This alternate dispute resolution mechanism allows the competent authorities in India and its treaty partner to negotiate a mutually acceptable settlement, making it a preferred option for settling cross-border tax cases.
The main benefit of MAP is the elimination of double taxation arising from disputes related to transfer pricingassessment, the existence of so-called permanent establishments, and characterisation of income and attribution of profits to such establishments.
Once a negotiated settlement is reached, the dispute can subsequently be withdrawn from the formal legal process, lightening some of the load on India’s judicial system.
Article 27 of the tax treaty between India and the US says a company facing potential double taxation can seek relief through the competent authority under MAP. The broad framework implies that the MAP dispute settlement process will be speedy, providing relief to companies and releasing tax revenue to the government.
The two countries settled a number of cases using this mechanism in 2010 but differences cropped up subsequently, bringing the process to a halt.
Both sides agreed to break the impasse and make progress on long-pending tax disputes ahead of Prime Minister Manmohan Singh’s visit to the US in September.
Officials from both sides then held several discussions to reach an agreement on the framework.
Finance minister P Chidambaram has also carried out changes in the tax administrative setup under his ministry to make clear that India will pursue a stable and non-adversarial tax regime.
Under MAP, both sides negotiate a settlement based on the parameters of the bilateral tax treaty. The resolution process draws up parameters for taxation in one country for which credit would be available in another.