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US, India Reach Transfer Pricing Agreement

by Mary Swire,, Hong Kong

21 May 2010

The US and Indian tax authorities have negotiated a settlement on a transfer pricing dispute concerning taxable profits of captive IT services and research subsidiaries of US companies.

The settlement, reached through the mutual agreement procedure under the Indo-US double taxation treaty, involved India agreeing to claim tax on profits of Indian subsidiaries on the basis of a mark-up over cost of 17.5% as opposed to 25-28% which it had asked for. However it has helped cement India's position as leading provider of outsourced IT services.

The settlement is only applicable for specific transactions in 2004-5, but is considered to be a good starting point for future determinations and an Indian government representative was quoted as saying that the resolution could benefit the Indian revenue by INR4-5bn (USD86.7m-108.4m).

Despite the authorities' negotiated settlement, the affected taxpayers can opt to agree the settled mark-up or appeal for something better under Article 27 of the tax treaty between India and the US.

Indian tax tribunals have decided, in some instances, to allow mark-ups as low as about 12%. The formulation of safe harbour rules would provide a more stable basis for resolution of these issues in the longer term and the Central Board of Direct Taxes is reportedly working on this.

This comprehensive report in our Intelligence Report series examines the global and national landscapes in which companies can use transfer pricing to improve their after-tax returns, including summaries of recent developments in design of the corporate supply train, the usefulness of 'offshore' in international corporate tax planning, and a section covering the spread of DTAAs and CFC laws. It is available in the Lowtax Library at and a description of the report can be seen at
TAGS: tax | business | double tax agreement (DTA) | India | law | group taxation | multinationals | transfer pricing | United States

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