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India, U.S. near tax pact to boost foreign investment
January 22, 2015 / 11:02 AM / 3 years ago

India, U.S. near tax pact to boost foreign investment

MUMBAI, Jan 22 (Reuters) - India is set to strike a bilateral tax agreement with the United States as early as this weekend, hoping to boost foreign investment and ease concerns raised by bruising disputes including cases against Vodafone and Shell.

The pact, which industry executives say would specifically target the prickly issue of transfer pricing, is part of the Indian government's broader push for bilateral tax deals with top trading partners including Britain.

A finance ministry source said there was already a broad agreement between the Indian and U.S. tax authorities. Several tax officials said a deal could be signed during U.S. President Barack Obama's visit to India, which begins on Sunday.

Transfer pricing, or the value at which multinational companies trade products or services between their units across borders, has been a contentious issue in India in recent years, with the tax department aggressively pursuing billions of dollars of claims.

The tax department has worried that foreign companies have been underpricing goods or services provided by their Indian units, in order to pay less tax.

Tax officials and lawyers with direct knowledge of the matter said the aim of the pact was to make it easier to predict the fiscal impact of doing business in India.

"This is a very positive framework where the government is saying that we don't always have to go ahead and litigate in most of the transfer pricing cases," said Sanjiv Malhotra, a partner law firm BMR & Associates LLP's direct tax practice.

India entered into its first transfer pricing tax pact with Japan last month.

The Indian tax department is also in talks with Britain, as well as a couple of other European nations, with agreements likely to be signed later this year, said the tax officials, declining to be named ahead of an announcement.

A slew of multinational companies including Vodafone Group Plc, Royal Dutch Shell Plc, IBM Corp, Microsoft Corp and Hewlett-Packard Co have fallen foul of India's tax collectors in last couple of years.

The tax department charged the firms with under-invoicing the value of products, services or shares offered to parents and, therefore, lowering tax liabilities.

A few companies including Shell have won favourable rulings in the Indian courts on those tax claims, but many other cases are still being litigated, and, tax lawyers said, the agreements between India and other countries won't involve those cases.

Finance Minister Arun Jaitley has repeatedly asked tax officials to move towards a tax-friendly regime to erase the "bad name" India has earned among foreign investors.

Last year, in his interim budget, he announced new measures to reduce litigation on the transfer pricing issue.

Under the bilateral pacts, the Indian government will enter into so-called advance pricing agreements, which set the tax liability of the transfer pricing value for the next four to five years, with other countries.

India introduced an advance pricing agreement in 2012 and talks between the United States and New Delhi for a pact first started in late 2013, but Washington's push to settle past transfer pricing cases have delayed the process.

"The agreement with the United States will give a major boost to the companies operating in India. The scope for litigation will come down significantly," said a consultant for transfer pricing taxation with a leading global firm. (Additional reporting by Manoj Kumar; Editing by Clara Ferreira Marques and SImon Cameron-Moore)

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