India, United States Settle Tax Profit Dispute

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May 20 – A tax dispute between India and the United States has been resolved with India agreeing to tax 17.5 percent of the profits earned by the Indian subsidiaries of U.S. companies in 2004-05.

Previously, India wanted to implement a 25 to 30 percent tax on profits of IT services and research arms of U.S. firms in the country. The latest transfer pricing settlement will only be applicable for corporate transactions in 2004-05 but could also set an example for future cases. India’s transfer pricing rules check an MNC from shifting profits out of India.

Following Article 27 of the India-U.S. tax treaty, a firm which has potentially incurred a double taxation can seek relief through the competent authority under the mutual agreement procedure.

Foreign business outsourcing units in the country have used Article 27 provisions when local tax authorities decided on transfer pricing adjustments of 25 percent to 30 percent tax for 2004-05.

“This is a positive interim step. Only safe harbor rules will provide a concrete solution to transfer pricing woes of captive service providers,” Som Mittal, president, Nasscom told The Economic Times.