On August 30th
2012, Government of India has introduced detailed provision/ rules on the framework
for Advance Pricing Agreement Scheme (‘APA Scheme’) in India. APA scheme
introduced through Finance Act 2012, is applicable from July 1st
2012.
Advance
Pricing Agreement (‘APA’) is an agreement between the taxpayer and the tax
authority in relation to an international transaction entered between
associated enterprises for the purposes determining an arm’s length price or
transfer pricing methodology in advance for future transactions. Once the APA
has been entered between the tax payer and the tax authority, the arm’s length
price of the transaction covered under an APA should be determined in
accordance with the APA so entered. Accordingly, APA Scheme would provide
conducive transfer pricing environment wherein taxpayer can be sure of
certainty and consistency in respect of acceptability of intercompany pricing
and transfer pricing methodology.
Types
of APA
Following the best global practices, APA Scheme in India provides an option to the taxpayer to
enter into any of the three types of APA;
(a) Unilateral APA – Unilateral APA is an agreement
between the tax authority and the taxpayer, it seeks confirmation of
transfer pricing or methodology by the tax authority for the taxpayer within
India. Accordingly, unilateral APA does not allow the taxpayer to avoid the
risk of taxation by foreign tax administrations. Unilateral APA might be
preferable wherein, in the foreign jurisdiction there is no or less active
transfer pricing regime or say wherein India does not have tax convention with
the other country. However, Unilateral APA may prove to have limited utility
where both tax administrations actively review the transactions between group
companies from transfer pricing perspective.
(b)
Bilateral APA – Bilateral APA is an agreement
between the tax authority and the taxpayer subsequent to, and based on
agreement between Indian competent authority and competent authority of another
jurisdiction. In general, bilateral APA are preferred above unilateral APA
since bilateral APA do provide certainty on two sides of the transaction
whereas a unilateral APA does only provide certainty on one side of the transaction.
Before concluding on Unilateral APA vis-à-vis Bilateral APA, it is suggested
that the taxpayer must carry out the cost benefit analysis of Unilateral APA
vis-à-vis Bilateral APA.
(c) Multilateral APA – Multilateral APA is an
agreement between the tax authority and the taxpayer subsequent to, and based
on agreement between Indian competent authority and competent authorities of other
jurisdictions. In general, multilateral APA is entered wherein stakes are high
and more than two tax jurisdictions are involved.
It is to be
noted that the process for bilateral or multilateral APA cannot be initiated
unless the associated enterprise situated outside India has initiated process
of advance pricing agreement with the competent authority in the other country.
Eligibility
As per
sub section (1) of section 92CC of the Act read with Rule 10G of the Rules ;
(a)
any person, resident or non-resident, who
proposed to enter into a new international transaction with its associated
enterprise, and /or
(b)
any person, resident or non-resident, who is
having continuing international transaction with its associated enterprise
can file an
application for an APA. The Indian APA Scheme follows five stages as commonly
seen also in APA schemes of other foreign tax jurisdiction;
(1)
Pre-filing consultation
(2)
Formal application for an APA
(3)
Analysis and evaluation
(4)
Finalising and signing an APA and
(5)
Execution, monitoring and review
Once
concluded, the APA would be in effect for a maximum period of five years,
depending on the actual agreement between the taxpayer and the tax authority.
APAs may be revised, renewed or cancelled depending upon the change in the
facts and assumptions.
Five
Stages
(1)
Pre-filing consultation – Prior to an APA
application, a taxpayer is required to make a written request, in Form 3CEC, to
the Director General of Income Tax (International Taxation). This is the first
step in APA process and should be taken seriously by the taxpayer. In this
stage the taxpayer is required to submit
entity and group level business information, details of associated enterprise,
details of international transactions including FAR analysis, proposed transfer
pricing methodology, comparable data and history of transfer pricing audit. In
case if the Applicant is seeking bilateral or multilateral APA, Indian
Competent Authority would also be a party to the consultation.
The
objectives of the pre-filing consultation includes determining the scope an
agreement, identifying transfer pricing issues, determining the suitability of
international transaction for the agreement and discuss broad terms of the agreement. The APA scheme specifies that pre-filing
consultation is neither binding on the tax authorities and nor on the
applicant. Further, at this stage, the applicant
is not required to deposit any fees. In particular, the opportunity to hold
pre-filing meetings with the APA team on an anonymous basis will
encourage taxpayers to explore the APA option.
(2)
Formal Application for an APA – An application
for an APA must be submitted using Form 3CED to the Director General of Income
Tax (International Taxation) in case of Unilateral APA and to the Competent Authority
in case of Bilateral or Multilateral APA. Along with an application, applicant the proof
of payment of the required fees should be attached.
Amount of
international transaction entered into or proposed to be undertaken in
respect of which agreement is proposed during the proposed period of
agreement.
|
Fees
|
Amount not exceeding Rs.1000 million
|
1 million
|
Amount not exceeding Rs.2000 million
|
1.5 million
|
Amount exceeding Rs.2000 million
|
2 million
|
On
perusal of the Form 3CED, it seems that the tax authorities might be more
inclined in entering into Bilateral or Multilateral APA wherein India has got
Double Taxation Avoidance Agreement.
(3)
Analysis and Evaluation - Upon receipt of the
APA application from the taxpayer, the tax authorities will evaluate the
contents of the application and may seek further clarification from the
taxpayer if necessary. A taxpayer who makes an APA application should note that
acceptance of an APA application does not necessarily mean that the proposed
transfer pricing methodology and other variables, e.g., arm’s length range,
etc. put forth in the APA application will be accepted in its entirety. Tax
authorities reserve the right to propose alternative methodologies, whether on
its own, or in consultation with its treaty partner (in a bilateral or
multilateral APA). In the course of the APA review and negotiation process, tax
authorities may ask for additional information, proactive support in providing
the requisite information might be critical to the success of the APA process. The
taxpayer may withdraw the application at any time by filing an application in
Form 3CEE, however, fees paid would not be refunded back.
(4) Finalising and signing an APA - Once the
analysis, discussion and evaluation is over, the tax authorities would proceed
to finalise and formally sign an APA.
The terms on an agreement might include international transactions
covered by the agreement, transfer pricing methodology, determination of arm’s
length price, critical assumptions etc.
(5)
Execution, monitoring and review - Once the
agreement is entered into, it would be binding on the tax payer and the tax
authority. However, in case there is a change in any of the critical
assumptions or failure to meet the conditions subject to which the agreement
has been entered into, the agreement can be revised or cancelled, by the tax
authorities. It is required that the tax
payer must file the annual compliance report, in Form 3CEF,in quadruplicate,
for each of the years covered in the agreement, within thirty days of the due
date of filing the income tax return for that year, or within ninety days of
entering into an agreement, whichever is later.
Author's comment
This is a
welcome move by the Government of India and we are happy to see that APA Scheme
is largely best on the global accepted standards. However, there are a few areas of concern:
(a)
Revision in APA - The fact that the APA team can
revise an already existing APA in the event of a change in the law may reduce
the benefit of having an APA.
(b)
Critical Assumption - Definition of the term
“critical assumptions,” is quite vague and give ample opportunity for varied
interpretation.
(c)
Firewall – As such the APA scheme do not provide
any fire wall mechanism, which increases the risk of sharing of confidential
and critical information by APA team with the tax officer at the time of Audit.
(d)
Timelines – The APA scheme does not prescribe
any timeline for APA team to conclude, this might be deterrent to business
decisions which are based on timeliness of action. However, in one of the conferences
held in September 2012, officials from India's APA program noted that the team
expects, and has the capacity to handle, 100 APA applications in the first year
of operations. If more APA applications are filed, the government is ready and
willing to provide the extra manpower to process these as well. India APA
representatives estimated that it would take less than 9 months to conclude a
unilateral APA and 12 to 18 months to conclude a bilateral APA.
(e)
Rollback – Request for application of transfer
pricing methodology or arm’s length price to the tax years prior to those
covered by the APA is known as rollback of APA. It could be an effective means
of using available resources to address unresolved transfer pricing issues. However,
APA Scheme does not have any such provision thus limiting the benefit to only
future transactions.
Best Regards
Gaurav Garg
JGarg Economic Advisors
New Delhi, India
Email: gaurav@jgarg.com
Mobile: +91 9899994934
