Indian Government releases Advance Pricing Agreement Guidance Booklet Global

28 May 2013
Global
Tax Alert
News and views from
Transfer Pricing
Indian Government releases
Advance Pricing Agreement
Guidance Booklet
Executive summary
To bring about certainty and uniformity with regard to determination of
the arm’s length price of an international transaction, the Indian Finance
Act 2012 introduced provisions to enable Advance Pricing Agreements
(APAs) in the Indian Tax Law (ITL). The Central Board of Direct Taxes (the
Board) thereafter issued the rules for implementing the APA program on
30 August 2012.1 Since the APA is a new program, to increase awareness
of the taxpayers about the APA program and its implementation, the
Board has released a booklet called the APA Guidance Booklet with
FAQs (APA Guidance). The APA Guidance deals with the procedure to be
followed by a taxpayer and the tax authorities before a taxpayer can enter
into an APA. The FAQs section in the APA Guidance provides clarifications
on certain general issues raised by the taxpayers with regard to the APA
process, disclosure requirements in the application, critical assumptions,
detailed functions performed, assets employed and risks assumed
(FAR) analysis, conversion of a unilateral APA to a bilateral/multilateral
APA, amendment/renewal/withdrawal of an APA, profit attribution to
Permanent Establishments (PE) and the impact of an APA on the actions
of the Assessing Officer/Transfer Pricing Officer. The FAQs section of the
Guidance also provides clarifications on the procedural and documentary
information required to be provided to the APA authorities.
Advance Pricing Agreement Guidance with FAQs
An APA is an agreement between the Board and the Taxpayer that
determines, in advance, the arm’s length price (ALP) or the manner of
the determination of the ALP (or both), in relation to an international
transaction. The salient points of the APA Guidance are provided below:
Pre-filing consultation
• The request for pre-filing consultation should include the global structure
of the Taxpayer’s Group preferably in the form of flow charts/diagrams
and a FAR analysis of the applicant and the associated enterprise(s).
In an anonymous request, the
Taxpayer’s Group structure could
be omitted; however a detailed
explanation of the subject
international transaction and
the FAR analysis needs to be
provided.
• Pre-filing understanding would not
only be restricted to determining
the scope of the agreement,
identifying transfer pricing
issues, determining suitability of
international transaction for the
agreement and discussing broad
terms of the agreement, but could
also include any other relevant
issue.
• If the taxpayer has more than
one international transaction, the
taxpayer cannot be compelled
to enter into an APA for all
the international transactions.
However if one transaction is
intrinsically linked with another
international transaction in a
manner that they cannot be
benchmarked separately, then
the tax authority can inform
the applicant that both the
transactions need to be covered
in the APA. The taxpayer may
also decide on whether to file for
a unilateral APA for one or more
international transaction while
going in for a bilateral APA for
others.
• The APA authority cannot
refuse a request for pre-filing
application.
• The preliminary understanding
reached at the time of pre-filing
does not bind the taxpayer or the
tax authority since the agreement
will be reached based on the
detailed analysis carried out after
filing of the APA application.
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• A written communication would
be provided to the taxpayer based
on the understanding reached
at the end of the pre-filing
consultations.
APA application and proceedings
• The taxpayer is required to
provide the multinational
structure, organizational
arrangement, operation set
up, including major transaction
flows preferably in the form of
flowcharts/diagram and a detailed
FAR analysis of the applicant and
the relevant entities.
• The critical assumptions
forming part of the application
may include legal, operational,
tax, financial, accounting
and economic conditions or
assumptions, even if they are not
within the applicant’s control.
• The APA authorities would
agree on the date of visit to the
premises of the applicant after
consultation with the applicant.
The purpose of the visit primarily
would be to understand the
business model and ascertain the
functional profile of the applicant.
• The APA authorities are not
bound by the past history for
the international transaction;
however details of audit history
of transactions are useful as they
give a better understanding to
the tax authorities to analyze the
information.
• If a taxpayer admits a PE, the
taxpayer can file an APA for
determining profit attribution to
a PE.
• There is no fixed time line for the
various steps in an APA process.
However the target timeline for
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the various steps can be discussed
during pre-filing consultations.
• The applicant can withdraw the
application before the draft
agreement is sent to the Board
(for unilateral APA) or before the
MAP arrangement is sent by the
competent authority to the Board
(for bilateral/multilateral APA).
Bilateral/Multilateral APA
• Requests for bilateral/multilateral
APAs can be accepted by the
Indian Competent Authority
where a tax treaty exists between
India and the other country
containing an article on Mutual
Agreement Procedure, the
tax treaty contains provisions
similar to Article 9(2) of the
OECD Model Convention on
Associated Enterprises, providing
for correlative relief and an
APA program exists in the other
country.
• A unilateral APA can be
converted to a bilateral APA
(without payment of additional
fee) before the mutually agreed
draft agreement is forwarded to
the Board and a similar request
is made with the competent
authority.
• Once a unilateral APA has
been entered into, MAP benefit
(correlative relief) will not be
available to the applicant/
associated enterprise(s)
with respect to the covered
transaction.
• In the case of a multilateral APA,
if negotiations with one or all
countries fail, the taxpayer has
the option to opt for a unilateral
APA or even a multilateral APA
with other countries.
• ITL mandates use of arithmetic
mean where more than one
price is determined by the most
appropriate method for arriving at
the ALP. However, an agreement
can be reached in a bilateral/
multilateral APA with countries
where the law mandates use of
the inter quartile range.
• The Taxpayer can opt for a
unilateral APA or a bilateral APA
at its discretion for any reasons
like no APA mechanism in the
other country or the Taxpayer
wants only tax certainty with India
or for any other reason.
Amendments to the APA
application
• The unilateral APA application
can be amended before the
draft agreement is sent to the
Board for approval. In the case
of a bilateral/multilateral APA, an
amendment can be made before
the MAP agreement is sent by the
competent authority to the Board.
However any amendment that
alters the nature of the original
application will not be considered.
• The conversion of a unilateral to
multilateral/bilateral APA would
not be taken to have effect of
altering the nature of the original
application.
• The applicant may also be required
to pay additional fees due to any
amendment in the application.
Filing fee
• If the value of actual international
transactions exceeds the projected
figures, it would not have any
impact on the quantum of fee paid
at the time of application. In such
a scenario, it cannot be concluded
that the taxpayer failed to meet
the critical assumptions forming
the basis of the APA negotiation
process.
• If a transaction to be covered in
an APA cannot be benchmarked
separately and is a part of a number
of closely linked transactions, then
all the transactions need to be
covered in the APA and the fee is to
be determined accordingly.
Regulatory provisions
• Regular provisions of the
ITL viz. maintenance of TP
documentation/filing of
Accountant’s certificate would
continue to apply until the APA is
concluded and a modified return
is filed. Similarly, the ongoing
audit proceedings will not be
impacted until the APA is finalized
and a modified return is filed by
the taxpayer.
• The Annual compliance audit
post an APA would not be a
broad based regular TP audit. It
would be focused on ascertaining
compliance with the terms of the
APA.
• The confidentiality provision
of the ITL allows sharing of
information filed during the
APA application/negotiation
process within the Income tax
department.
• The taxpayer does not have a
remedy to appeal against the
decision of the Board to cancel
the APA application. However
the taxpayer has the right to
take recourse to constitutional
remedies.
• There are no roll back provisions
in the APA rules.
• There is no provision of providing
additional benefit of the arm’s
length range (variation up to 3
percent) to the taxpayer beyond
the price agreed under the APA.
• Retrospective amendments in
law governing the APA can have
an impact on the APA already
concluded.
Use of Experts
• The APA rules provide for
inclusion of experts in statistics,
economics, law or any other field.
The Director General of Incometax (International Taxation) has
been given the power to nominate
experts. These experts would be
taken from other Government
departments and their services
would be case specific and need
based.
Comments
The Advance Pricing Agreement
Guidance Booklet with FAQs
issued by the Board provides
clarity on a number of issues that
taxpayers may have had about the
APA program. It is expected the
APA Guidance will prove to be an
effective and convenient tool to
educate taxpayers in complying
with the provisions of the program.
Endnote
1. Refer to our Transfer Pricing Alert, India publishes rules for implementing Advance Pricing Agreements, dated
4 September 2012.
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For additional information with respect to this Alert, please contact the
following:
Ernst & Young
Assurance | Tax | Transactions | Advisory
Ernst & Young LLP (India)
• Vijay Iyer, New Delhi
• Rajendra Nayak, Bangalore
+91 11 6623 3240
+91 80 4027 5454
[email protected]
[email protected]
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