Revise tax pacts: MNCS to tax dept
Seek clarity on revising advance pricing agreements
The Covid-19-led economic disruption may lead to reopening several specific tax agreements that multinational companies (MNCS) have with Indian tax authorities. These companies are reaching out to the direct tax board to seek clarity on revising the advance pricing agreements (APAS) with critical assumptions and preset margins having become irrelevant on account of factors like relocation of persons, supply-chain disruption, abnormal expenses, change in asset deployment, risk assumed, etc.
Tax authorities are of the view that while all agreements may not be affected since APAS are long-term in nature, the government will consider if companies have documented the specific changes.
Industry has asked the income-tax (IT) department to issue a directive on the modification of APAS due to the Covid-19 pandemic, taking into account stress and the economic situation. Most companies, barring those in software, information technology (IT) or consumer non-durables space, have been affected and been forced to alter supply chains and business models.
Mukesh Bhutani, managing partner at BMR Legal, said with most sectors except IT impacted, there had been instances where APA authorities had been approached for revision and a case-by-case approach is being applied.
“A guidance shall certainly assist. The situations are revision of agreed APAS and a new approach to deal with ongoing APAS, with regard to the impact on margins for the current fiscal year,” said Bhutani.
He added that besides reviewing the agreed APAS, the government would have to review downwards safe harbour limits, and exercise discretion on transfer pricing audits supported by strict administrative guidance.
“The absence of active tax administration and orientation of field officers to deal with post-covid situations of transfer pricing audits is the biggest challenge,” added Bhutani.
Rahul Garg, partner, PWC India, said companies in the non-it space, such as travel or hospitality, were among the ones thinking of moving to the APA authorities for a revision in agreements.
APA is basically an ahead-of-time understanding between a taxpayer and the tax authority on an appropriate transferpricing methodology. APAS provide certainty to the company operating in India for a maximum of nine years (prospective five years and four roll-back years) and avoid conflicts over sharing of taxes between India and the other countries, and reduce transfer-pricing disputes.
Sunil Gupta, head-direct taxation, Reliance Industries, pointed out at a recent industry discussion that in cases where there is relocation of assets of change in functions and risks, taxpayers would like revision in APAS.
“There are cases where we will need to apply for revision in APAS, where long-term plans are not achievable. It requires a directive and a liberal guidance from tax authorities and that the Covid situation should be considered sympathetically,” said Gupta at an international tax webinar organised by the Associated Chambers of Commerce and Industry of India.
A senior tax official said a revision may be possible in accordance with the law. “The APAS are long-term agreements and are normally expected to be honoured by both parties. But, in Covid-type situations, there is a provision under which taxpayers can go and ask for a change. If changes in assumptions are within the parameters of the law, I don’t see why they won’t be revised.” APAS could be a unilateral pact between the firm and Indian tax authorities or a bilateral agreement involving a foreign country. According to I-T rules, an agreement may be revised if there is a change in critical assumptions or failure to meet a condition, subject to which the agreement has been entered into.
However, the official said documentation will be key in such scenarios. “We will look for documents, so a firm must have relevant documents in place. If a company has changes taking place, such as assets getting redeployed, etc and there is documentation in place, the government will consider,” said the official. A formal guidance on revision may be issued.