India: India Introduces Guidelines For Advance Pricing Arrangement Program

Last Updated: 30 October 2012
Article by Dale Hill

INTRODUCTION

On August 30, 2012, the Central Board of Direct Taxes ("CBDT") issued guidance on its advance pricing arrangement ("APA") program. This release provides critical guidance to taxpayers and brings in much needed rules to introduce the APA program in India. The introduction of the APA program is designed to give taxpayers greater certainty on international transactions between related parties operating in two or more tax jurisdictions. Much of the guidance discusses provisions that, in name, are similar to those implemented in countries where transfer pricing legislation is more developed, such as Canada. The release of this guidance is welcomed. The news signals that India is serious about providing taxpayers with a clear framework for gaining tax certainty.

The CBDT can expect to face a steep learning curve when developing the APA program, as it relates to how it will provide the benefits that multinationals need and expect. Given I was involved in the Canadian APA program from its early inception and witnessed how it evolved over the years, I will draw on my 17-years of APA experience from both the Government and private sector to illustrate how the APA program in India should evolve and the problems it may face.

Why an APA Program is Important

India has been an economic wonder over the last decade. The country has achieved astonishing economic expansion while simultaneously keeping inflation in check. As the world economy becomes increasingly globalized, countries need to ensure that their international tax laws and practices are seen as transparent. Failure to institute legislation that is deemed transparent by international investors serves to increase uncertainty and helps drive investors away. Generally speaking, tax systems that allow firms to understand what is expected of them, and the consequences associated with not complying with tax laws, serve to improve the economic climate for international investors.

Transfer pricing can serve as a tool used by companies to reasonably assign profits to lower tax jurisdictions by strategically locating functions, assets, and risks. India is viewed by many foreign nationals with suspicion. In relation to the current transfer pricing climate in India, many taxpayers view the Indian tax authorities and the transfer price adjustments they generate as inconsistent, viewing the tax authority with much precaution. Adjustments vary from state to state, and the size and scope of such adjustments do not seem to make economic sense. Consequently, firms should know what to expect and how to gain tax certainty as they relate to transfer pricing.

Given an APA is a formal arrangement between a particular taxing authority and a taxpayer involved in cross-border transactions with a foreign related entity to gain tax certainty on one or more international transactions, gaining some degree of tax certainty for firms operating within India becomes a welcomed feature of the Indian tax code. The recent guidance for the APA program demonstrates that the Indian Governments want to find a way for taxpayers to achieve this certainty, as they relate to international transactions. While this may be deemed as good news by the international community, and may increase foreign direct investment, much time will be needed to ensure that the skill required to generate tax certainty (through the determination of arm's length prices) and the culture required of the CBDT to apply the arm's length standard consistently is met. While the arm's length standard is enshrined in current Indian legislation, ensuring the arm's length result is applied is a different matter.

Indian APA Program

The guidance provided in Notification No. 35 contains many issues that taxpayers need to consider. Key provisions include:

1. Taxpayers are allowed to conduct pre-file meetings in person and on an anonymous basis.

2. A basis for completing a bilateral, multilateral and unilateral APA and allowing for the completion of a renewal.

3. APA may be applied to existing and future transactions.

4. Guidance on the application process and the manner in which applications can be modified or withdrawn.

5. A requirement that the APA team have employees experienced in a wide range of disciplines including economics and law.

6. No provision provides for the use of rollbacks.

Concerns with the Current APA Program

The above guidance overview, as it relates to the APA program in India, seems encompassing and the business community should be pleased with the efforts the CBDT has taken to make the APA program viable. However, some concerns remain:

Lack of timelines for completion: Guidance on APAs do not tell perspective firms entering the APA when their APA will be completed. This is problematic given the APA program is designed to gain tax certainty, and resolution is not assured. This does not create an environment that enhances the level of certainty firms are seeking when entering into the APA program.

Sharing of Information: India is a developing economy. Given the lack of experience in transfer pricing, many adjustments involving the same issues vary across Indian states. This has created a lot of precaution amongst taxpayers related to the Government's ability to apply transfer pricing rules fairly and consistently. The current guidance provided by the CBDT fails to adequately address the issues of safeguards with respect to sharing of information between the APA program and other areas of tax administration. While the provisions allow for taxpayers to come forth anonymously, they do not clearly articulate how such consultations will be carried out.

Lack of Rollback Provision: The guidance provided in Notification No. 35 does not mention anything about the rollback of results obtained in the APA to previously unaudited years. The failure to include such a provision will diminish the level of tax certainty the APA program provides to taxpayers. Many companies apply for an APA in order to resolve contentious issues they have with the field auditor. Not allowing the taxpayer to apply the results gained by an APA to unaudited years, where the facts are comparable to those in the APA, allows uncertainty to remain for the taxpayer (as will be discussed in more detail below).

Comparing and Contrasting The Canadian and Indian APA Programs

Personnel

An APA is an arrangement between a taxpayer and a tax administration to confirm the appropriate transfer pricing methodology for a non-arm's length transaction. The Canadian APA program began in December 1994, with the release of IC94-4.1 Much like the directives released by the CBDT that the APA be multifaceted in India, the Canadian competent authority and those that make up the APA team include a wide range of people with varying backgrounds.

The Canada Revenue Agency ("CRA") has recognized that transfer pricing is clearly not an exact science. As such, it relies on auditors with many years of experience and economists who have been trained to treat economic aspects of transfer pricing in a robust manner. The typical APA team is composed of a lead analyst, an economist from the Competent Authority Services Division and an auditor from the taxation services office. The CRA has learned that a team that is multifaceted will likely result in the deployment of expertise needed to achieve the arm's length standard in a reasonable amount of time. In addition to the technical skill required to determine an arm's length price, the APA program is also designed to ensure and foster consistency with the field. At the pre-filing stage, the Chief Economist (who is responsible for providing advice to the field officers) attends meetings to ensure consistency is being met between transfer pricing methodologies used in the field and those that apply within the APA program. This mechanism ensures that transfer price determination is consistent at various levels of the CRA.

The need for skillful APA officers to routinely participate in site visits is another area the CBDT should incorporate into their APA program. It has been my experience that when both APA teams participate in site visits, when completing a bilateral APA for instance, less contention exists over the functions, assets, and risks assumed by related parties. When only one APA team attends a site visit, however, their development and interpretation of facts may differ substantially from those of the other APA team. Ensuring that site visits occur as a normal part of an APA program should therefore be fostered. This should result in less contention existing between APA teams, which should decrease the time required to complete an APA.

An important aspect that arises when considering whether to perform site tours surrounds the issue of costs. Fees charged by Governments offering an APA program can include "APA filing fees" or fees that cover all or part of the cost of site tours. It has been my experience that countries that do not require fees dedicated to travel costs (and thus only charge filing fees for instance) resulted in their APA teams performing little, if any site tours. Countries that did charge fees specifically associated to cover costs of travel (such as Canada) did result in those APA teams engaging in more site tours.

Within the Indian context, those applying for an APA need to pay a filing fee based on the size of the international transaction entered into or proposed. The fee can range from 10 lakhs to 20 lakhs. It is not entirely clear if any part of this will be devoted to incurring travelling costs related to site tours. In order to improve the fact gathering capability of the Indian APA team, some part of this fee should be devoted to travel, or a separate additional fee should be considered to pay for travel, in order to enhance the team's ability to gather facts and settle files. Lastly, a system that allows senior auditors and accountants to train new professionals coming into the program is key to ensuring that enough knowledgeable staff exists to complete APAs. The inability of the CRA to complete files in the past were largely the result of not having enough qualified staff.

The Indian tax authority can gain from implementing similar procedures as those discussed above that would ensure both consistency and the completion of APAs in a timely fashion.

Mechanisms for Achieving Double Tax Avoidance

The APA program is designed to avoid the incidence of double taxation by agreeing on an intercompany price that is acceptable to one or more tax authorities. The benefits that an APA brings include prospective avoidance of double taxation, penalty protection, and efficient resolution of recurring complex transfer pricing issues (less taxpayer time and audit resources). APAs provide long term savings as well. APA renewals are usually less time consuming. However, one area where the two APA programs differ materially involves the potential application of APA findings to past unaudited years. CRA will usually agree to accept a request to "rollback" the terms and conditions of an APA to open tax years if facts and circumstances are substantially similar.

As transfer pricing audits increase and the issues identified by auditors become more complex, the APA program may be appropriate. However, all potential issues must be considered before applying for an APA. As part of a strategy in applying for an APA in Canada, many firms consider the application of a rollback. Rollbacks are relevant where adjustments in previous (and often contentious) years are significant.

In Canada, a rollback, requested as part of a bilateral APA, will no longer be considered for a taxation year where the CRA has issued a letter to the taxpayer requesting documents from the taxpayer regarding the taxation year in question for the purpose of an audit. However, if a taxpayer requests a rollback before the audit letter has been issued, it is equivalent to a voluntary disclosure. The rationale for this resides in the fact that a rollback is not intended to replace an audit or as a mechanism for avoiding an audit. If audit letter has not been issued, an auditor will not make a referral to the Transfer Pricing Review Committee if an upward adjustment in a rollback year exceeds the penalty threshold. This may create an incentive to apply for an APA in situations where contemporaneous documentation was not prepared for prior years, as it reduces exposure to transfer pricing penalties that could come about in a random audit.

Applying rollbacks allow the taxpayer to receive more tax certainty at no additional cost to those involved. Given the use of a rollback is only applied in situations where the facts found within an APA period are similar to those in the unaudited years, an APA rollback is a win for the taxpayer at no cost to the APA team. The application of rollbacks are important and the CBDT should consider instituting such rollbacks to its current rules with accompanying guidance.

Realities of an APA

The success of the Canadian APA program resides partially in the fact that when all parties understand how files are resolved, all parties can do their part in securing an APA. It has been my experience that the presentation of facts is critical. As a result, all important information must be provided at the time of filing a submission. Information provided later carries less weight and is often met with some skepticism from the tax authorities. Indian tax authorities must ensure that submissions accepted meet a high standard. Although APA negotiations are generally principled, results are important. Therefore, information that justifies a particular result becomes fundamental.

Procedure

The procedures outlined in completing an APA in India are similar to those found in Canada. Within the Canadian APA program, the following steps are taken to complete and renew an APA:

  • Prefiling meetings
  • Formal acceptance letter and user charges
  • APA submission
  • Review and evaluation phase
  • Finalization phase including negotiations
  • Compliance phase
  • APA renewal

There are some concerns with certain administrative aspects related to securing an APA in India. For example, the CBDT does not provide any guidance on the length of time it will take to complete an APA. In the Canadian APA program, the policy is to complete a bilateral APA in two years. Another issue deals with privacy and how taxpayer information is dealt with. While the APA process in India provides for anonymous prefiling meetings, the guidance does not provide information on how this would occur. Also, no guidance is given that assures taxpayers their information will not be shared with other members of the tax agency. While no guarantees exist in the Canadian APA program, Canadian taxpayers are assured that this information is not abused (given that many safeguards exist within the Agency that prevents abuse). The CBDT must ensure that safeguards and firewalls are clearly in place to ensure that no abuse related to APA information takes place.

Conclusion

The tax efficiencies the Indian APA program will create, and the impact that the newly-issued guidance will have on taxpayers, will depend on a number of factors, including the level of experience developed by the CBDT and whether the existing rules found in Notification No. 35 are applied consistently across all taxpayers who seek tax certainty within the APA program. Time will be required to get the CBDT "up to speed" on how to implement the rules fairly and consistently across various regions and sectors, in a way that meets the arm's length standard. At the same time, the CBDT must gain the trust of taxpayers to make them feel comfortable that they can achieve real tax certainty when going through the APA process and trust their dealing will be professional. Despite the potential hurdles that await the CBDT, this new guidance is certainly a welcome first step to providing taxpayers a practical avenue to gaining tax certainty.

Footnotes

1. APAs are completed within the Canadian Competent Authority Services Division and is found with the International and Large Business Directorate of the CRA.

Originally published in International Taxation -Vol. 7 -October 2012 77

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions