After Vodafone, will Budget 2012 change norms on taxing international deals?

Following the Vodafone tax saga, the government has come under increasing pressure to change taxation rules on international transactions, especially in areas of transfer pricing and those involving Indian assets.

That’s why Finance Minister Pranab Mukherjee is likely to announce some major taxation changes for international transactions in the forthcoming Budget in order to bring more transparency in such deals, reports the Business Standard.

[caption id=“attachment_211042” align=“alignleft” width=“380” caption=“Multinational companies use transfer pricing as a tax-saving tool to shift profits to countries with low tax rate. Reuters”]  [/caption]

The Industry body American Chamber of Commerce in India (AMCHAM) has already asked the government to introduce the Advance Pricing Agreement (APA) mechanism to check transfer pricing disputes in the forthcoming budget in case of a delay in implementation of the Direct Taxes Code Bill (DTC).

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“…in case the implementation of the DTC is delayed beyond its stated effective date, APA be brought through the Income Tax Act itself,” the chamber said in its pre-Budget memorandum to the Finance Ministry.

The APA mechanism will allow companies to enter into agreements with the tax authorities to prevent future disputes with regard to pricing of products and services for the purpose of cross-border trade between related entities. Introduction of transfer pricing agreements will allow companies to compute transfer prices within a group company.

Multinational companies use transfer pricing as a tax-saving tool to shift profits to countries with low tax rates. However, in the process , the respective country loses tax revenues.

Although the DTC has made a provision for introduction of the APA mechanism, the new direct tax law is unlikely to come into force from April 1, 2012 as it is currently under scrutiny by the Standing Committee, the newspaper said.

Sources told Business Standard that an administrative set-up to handle APA issues had already been initiated by the Income Tax Department. “As DTC is unlikely to come in 2012-13, the minister is likely to announce either the implementation of APA in the next financial year or a road map to bring it,” the newspaper quoted ministry sources as saying.

You can read the full Business Standard story here.