Budget could change provisions to tax international transactions

Finance Minister Pranab Mukherjee is likely to announce big-ticket changes in taxation provisions for international transactions in the Budget. These may include the introduction of advance pricing agreements (APAs) to handle transfer pricing effectively and transparently.

A senior finance ministry official said the government was under pressure to bring new provisions to tackle new modes of transaction in a globalised environment, especially in areas of transfer pricing, transactions by Indians in other countries and international transactions associated with Indian assets, as in the case of Vodafone.

The introduction of advance pricing agreements for international transactions will bring certainty to transfer pricing issues. Taxpayers (companies) would be able to enter into an agreement valid for five years with the tax administration on the method to compute an arm’s-length price for their international transactions.

The official said the income tax department had initiated the process for the creation of an administrative set-up to handle APA issues. “The measure had to come with the Direct Taxes Code (DTC). But, as DTC is unlikely to come in 2012-13, the minister is likely to announce either the implementation of APAs in the next financial year or a road map to bring it,” he added.

Section 92CA of the Income Tax Act provides that a transfer pricing officer (TPO) can determine the arm’s-length price (ALP) in relation to an international transaction referred to the TPO by the assessing officer. Further, Section 92CA (7) provides that for the purpose of determining the ALP, the TPO can summon or call details for inquiry or investigation.

Section 92CA has been amended to enable the TPO to determine the ALP in respect of other international transactions, noticed by him subsequently, in the course of proceedings.

Changes enabling the TPO to conduct an on-the-spot enquiry and verification have been made in provisions with effect from June 1, 2011. The government also announced the withdrawal of the blanket tolerance limit of five per cent in Budget 2011-12 from April 1, 2012. The official said the minister was likely to extend its implementation by another year in case a notification could not be brought by March 31. International tax consultant Tarun Chaturvedi said currently the arm’s-length range was based on a uniform tolerance limit of five per cent around the actual transaction transfer price.