Wednesday 19 March 2014

Few Points on Advance Pricing Agreement.


Ø  Following are the few red flags by Indian tax authority under transfer pricing assessment.
§  Sales Supply chain structures
§  Procurement activities
§  Low margin
§  Intellectual Property payment  (IP)
§  Captive call center or BPO
§  Activities that develop IP
§  Inter group Loan, Corporate guarantee etc
§  Allocation of HO Expenses & management fees
§  Share capital & share application
§  Business restructurings.

Ø  Disadvantage of normal TP assessment process.
§  TPO will make un0necessary adjustment
§  Once adjustment still no clear directions from appeal and dispute continues at various level of appeal
§  One year assessment is separate from another year and hence any favorable judgment for one year will not help for other years.
§  In case of stay not granted, then assessee require to pay tax under protest.
  
Ø  Salient Features of APA
§  Effective from 1-7-2012
§  Valid for 5 consecutive years
§  Binding on both Tax authority and tax payer
§  No roll back
§  Bilateral APA option available
§  Fees Structure  is Rs.1 Mn  when transaction value less than Rs. 1bn, Rs. 1.5 Mn when   transaction value less than Rs. 2 bn  otherwise Rs 2 Mn.
§  New Rules introduced – Rules 10F- 10T & 44GA (bilateral).

Ø  Advantage of APA
§  Address concerns around domestic law process, provides certainty and enhanced predictability.
§  Proactively avoids TP controversy
§  Discussion at right level
§  Solution to complex & difficult TP issues.
§  Eliminates/ reduces risk of economic double taxation and can reduce compliance cost.
§  No TP Audit


Ø  Risks of APA
§  Time consuming exercise especially with bilateral APAs and Multi- lateral APAs.
§  Strain on resource for taxpayers and tax authorities.
§  Taxpayer may be asked for additional detailed information which may be not asked so far.
§  May not provide certainty in case of unilateral APA or if an APA involves un-reliable prediction on market conditions without adequate critical assumptions.
  
Ø  Timeline – 9-12 months for unilateral and 18-24 months for bilateral APA 
Ø  The APA order are confidential and will not be available in public domain.  

Ø  Characteristics of an APA
An APA normally requires agreement on these major items: 

§  choosing a transfer pricing method
§  selecting comparable uncontrolled companies or transactions (comparables)
§  deciding on the years over which comparables’ results are analyzed (the “analysis window”) and related matters;
§  adjusting the comparables’ results because of differences with the tested party; constructing a range of arm’s length results
§  critical assumptions
§  testing results during the APA period and consequences of being outside the arm’s length range. 

Ø  Forms Prescribed .
 
Particulars
Form No.
Application for a pre-filing meeting
3CEC
Application for an APA
3CED
Application for withdrawal of APA request
3CEE
Annual Compliance Report on APA
3CEF
Application
3CEE
Ø  3
Ø  APA, agreement and terms:
The APA would be entered into by the Board and the taxpayer after getting  approval from the Central Government. An APA would cover the following points:

o   international transactions covered
o   agreed transfer pricing methodology, if any
o   determination of arm’s length price, if any
o   definition of relevant terms
o   critical assumptions
o   time period of APA
o   other conditions, if any, not covered in the Income Tax Act or in the Income Tax Rules

Ø  MAP VS APA 
MAP APAs are governed by the mutual agreement procedure of the applicable double tax agreement, Article 25 of the OECD Model Tax Convention, and are administered at the discretion of the relevant tax administrations. The guidelines provide that if a taxpayer does not request a MAP APA, then the reason should be reviewed, and wherever possible, tax authorities should encourage the taxpayer to request a MAP APA if the circumstances are suitable. The negotiation of MAP APAs requires the consent of the relevant competent authorities. In some cases the taxpayer might voluntarily take the initiative by making simultaneous requests to the affected competent authorities. The willingness to enter into MAP APAs will depend on the particular policy of a country and how it interprets the mutual agreement article of its bilateral treaties. The desire of the taxpayer for certainty of treatment is therefore not, in isolation, sufficient to execute MAP APAs.

The fact that a taxpayer may be under audit or examination should not prevent the taxpayer from requesting a MAP APA in respect of prospective transactions. The audit or examination and the mutual agreement procedure are separate processes and generally can be resolved separately. Audit or examination activities would not normally be suspended by a tax administration whilst the MAP APA is being considered, unless it is agreed by all parties that the audit or examination should be held in abeyance because the obtaining of the MAP APA would assist with the completion of the audit or examination.

Though the MAP process may provide more certainty and entail cost savings to the taxpayer, it is to be noted that it might not always be possible to apply a single transfer pricing methodology to a wide variety of facts and circumstances, transactions and countries likely to be the subject of a multilateral MAP APA. Therefore, care needs to be taken by all the participating jurisdictions to ensure that the methodology, even after such adaptation, represents a proper application of the arm’s length principle in the conditions found in their country.
 
Ø  FAQ
·           How are APAs different from  Mutual Agreement Procedure (MAP)? 

MAP is a mechanism laid down in tax treaties to ensure that taxation is in accordance with the tax treaty. This can also be invoked when a tax payer suffers or is likely to suffer an adverse action during transfer pricing audit to avoid economic double taxation. On the other hand, APA can be entered into for prospective years. Tax payers with litigation history may opt to file MAP in respect of pending disputes and also opt for APA for the same   transactions for the future years as an effective dispute resolution/
avoidance strategy.

·          What is pre-filing consultation?

The APA Rules provide for a preliminary consultation before formally lodging an APA application. In such  consultation, the tax payer and the APA team will discuss and clarify the scope of the APA, the transfer pricing issues involved and whether an APA can be executed or not. The pre-filing consultation is mandatory, and specified information has to be filed as part of the pre-filing application. However, the discussion during the pre-filing meeting is not binding on either the tax payer or the tax authorities. 

·          Can tax authorities reject any APA application based on the outcome of the pre-filing discussions?

The pre-filing consultation would not bind the CBDT or the tax payer to either initiate the APA process or  to enter into an APA. However, it may be possible that in a pre-filing meeting the authorities may indicate their reluctance to accept the proposed methodology which could influence the negotiation process. It is expected that that understanding reached at this stage will be communicated in writing.

·         Can a tax payer amend the APA application once filed?

Yes. An applicant can request in writing for an amendment to an application, at any stage, before the finalization of the terms of the agreement.
 


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