U.S. double tax negotiations with India are at an impasse, according to IRS Deputy Commissioner (International) Michael Danilack. At the Pacific Rim Tax Institute in Palo Alto, Danilack—the U.S. Competent Authority—blasted his counterpart in India for taking the position “that we should ignore cost plus arrangements, that risk allocation does not matter, that we should look past cost plus and go straight to profit split.” Danilack also criticized the Indian official for attempting to advance a policy agenda during negotiations when “it is not clear that his agenda is in fact the position of the Indian government.”
This is not the first time negotiations with a foreign competent authority have reached a standstill. Practitioners reported a similar situation with Canada in 2004, saying at the time that Canadian negotiators were taking inconsistent positions designed to maximize Canadian revenue in every case, disallowing deductions for intangibles routinely permitted by other tax authorities, and even failing to negotiate in good faith. U.S. and Canadian officials attempted to solve the situation by setting out an appeals process for cases in which negotiators failed to agree on the facts six months after the initial meeting in a case. Eventually, the two nations agreed to a mandatory, binding provision in their treaty under which cases unresolved after two years must go to an independent arbitration panel—and that appears to have worked well.
But arbitration is not likely to appear in a treaty with India anytime soon. Anita Kapur, Director General of Income Tax in New Delhi, was quoted in late 2010 as having strong objections to the use of arbitration in resolving bilateral disputes, and there have been no indications since then that her position has changed. Kapur said the process is unfair to developing counties because in an arbitration, a multinational company “supported by the best legal brains and abundant resources can be pitted against a developing country with limited resources, so this is a fight between two unequal parties.”
Molly Moses, Managing Editor, Transfer Pricing Report
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