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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