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Advance pricing agreement

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An Insight to Advance Pricing …

An Insight to Advance Pricing
Arrangements

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  • 1.       Transfer Pricing Update   An Insight to Advance Pricing Arrangements                                            
  • 2. Para 4.123 – “ An advance pricing arrangement (“APA”) is anAn Insight to Advance Pricing arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriateArrangements adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixedAdvance Pricing Arrangements (“APAs”) that introduced in Union period of time. An APA is formally initiated by a taxpayer and requiresBudget 2012-13 may go a long way in bringing down transfer pricing negotiations between the taxpayer, one or more associated enterprises,related disputations in the country. and one or more tax administrations. APAs are intended to supplement the traditional administrative, judicial, and treaty mechanisms forThe proposal allow the Central Board for Direct Taxes (‘CBDT’ or ‘the resolving transfer pricing issues. They may be most useful whenBoard’) of the Indian Revenue Service, with the approval of the Central traditional mechanisms fail or are difficult to apply. Detailed guidelinesGovernment, to enter into APAs with taxpayers for up to five years, for conducting advance pricing arrangements under the mutualbinding both the taxing authority and taxpayer with regard to the agreement procedure (“MAP APAs”) were adopted in October 1999 andtransactions covered by the agreement. A summary of key provisions of are found as an annex to chapter IV of OECD guidelines.”the legislation is attached as Annexure A.APAs are a tool to facilitate voluntary compliance with India’s transfer  pricing rules. An APA can deliver significant benefits to both a taxpayerand the tax authorities in terms of certainty of outcomes and efficiencies Objectivewith compliance and administration. Moreover, both parties mayachieve savings in compliance and administrative costs that inevitably The objective of an APA is to deliver certainty, for both the taxpayer andarise from transfer pricing rules. Therefore, having regard to the mutual the tax authorities, of the tax outcomes of the taxpayer’s internationalbenefits that derive from an APA, it is further recommended that each transactions by agreeing in advance the arm’s length pricingparty should approach the APA process in a spirit of cooperation and methodologies to apply to the taxpayer’s international transactionsopenness and with an intention to achieve a win-win outcome for each covered by the APA.party. An APA may thus, remove an audit threat (eliminate the need for anAn Advance Pricing Agreement/arrangement (APA) offers a way to audit), deliver a particular tax outcome based on the terms of thesecure tax authority approval of your transfer pricing policies and agreement, and often substantially reduces compliance costs over themethodologies for up to five years in advance. It is a framework for the term of the APA. This enables a more efficient and effectivetax administration and a taxpayer to agree that, provided the taxpayer management of transfer pricing compliance requirements by bringingfiles its tax return in accordance with the agreed APA conditions for the fairness, simplicity and efficiency, which may otherwise lead toAPA covered years, the tax administration accepts the tax outcomes as protracted and disputed dealings between a taxpayer and the taxbeing consistent with arm’s length outcomes, and thereby refrains from authorities, including difficulties involved in resolving economic doubleauditing the taxpayer’s international transaction(s) covered by the APA. taxation.OECD transfer pricing guidelines says the following on APAs: Thus, for a taxpayer, an APA can be an effective tool for better managing the tax risks arising from international transactions. For taxDefinition and concept of advance pricing arrangements 1   
  • 3. authorities, an APA can similarly be an effective tool for better and more • Annual compliance reporting responsibilityefficient administration of the transfer pricing laws.Benefits of APA Types of APAs• The Advance Pricing Agreement (APA) binds the taxpayer to a transfer pricing methodology that the revenue agrees not to The Union Budget 2012 provides that the Indian tax authorities may challenge. This is provided that all terms of the agreement are enter into an APA “with any person”. Therefore, there are two broad followed. categories of APAs that could be covered : (1) unilateral – that is, an APA that consists of an agreement between the Indian taxpayer and the• Upon audit, the revenue will not challenge that transactions Indian tax authorities; and (2) bilateral or multilateral – that is, an APA between the taxpayer and the related party have not been that consists of agreements between the Indian taxpayer and the tax conducted at arm’s length. The agreement may be made with only authorities, and between Indian and foreign tax authorities. the taxpayer, or with a related party and/or with foreign tax authorities. A unilateral APA is best suited to those cases where it is either unnecessary to involve a foreign tax authority in the APA process (e.g.,• The advance acceptance affords the taxpayer the knowledge that where the counter-party to an Indian resident’s international related no adjustment will result if the agreement is followed. It spares the party transaction is a taxpayer in a country which does not have a tax taxpayer the ordeal of a detailed audit to verify the appropriateness treaty with India), or where it is considered that there is very little of the TPM used in transactions. attendant tax risk for the counter-party from the transfer pricing method being proposed for the APA. A unilateral APA would also be appropriate• It would be an efficient resolution of otherwise recurring complex where a foreign tax authority declines to participate in what would appellate issues, minimization of global risk, freedom from otherwise be a bilateral APA. Unilateral APAs would therefore involve preparing annual transfer pricing documentation, etc. only the Indian taxpayer and the tax authorities. This limited involvement of parties to the APA means that a unilateral APA is likelyContents of APA to be able to be finalized in a relatively brief period of time compared to an APA that would necessitate the involvement of another tax authority.The content of the APA scheme should be sufficiently broad to providepractical guidance on most matters relating to an APA arrangement. A bilateral or multilateral APA would require the involvement of at leastWhile the scheme’s coverage may not be exhaustive, it should cover one other tax authority in the APA process. This involvement wouldmatters such as – occur under the provisions of the mutual agreement procedures article and/or the exchange of information article in India’s tax treaty with the• Transactions covered by the APA other relevant country. This type of APA is often referred to as mutual• Transfer pricing method (TPM) agreement procedures (MAP APA). A MAP APA is therefore best suited• APA term where the Indian resident’s international related party transaction(s) occurs with a related party that is a taxpayer in a tax treaty partner• Operational and compliance provisions country. The agreement with the foreign tax authority ensures there is• Appropriate adjustments no economic double taxation in respect of the transaction(s) covered by• Critical assumptions regarding future events the APA.• Required APA records 2   
  • 4. A MAP APA generally consists of at least three agreements – certainty to the taxpayers concerned. It is also the case in some countries that domestic provisions do not permit the tax administrations(1) between the Indian tax authorities and the foreign tax authority, to enter into binding agreements directly with the taxpayers, so that(2) between the Indian taxpayer and the Indian tax authorities, and APAs can be concluded with the competent authority of a treaty partner(3) between the foreign tax authority and the related party in the foreign only under the mutual agreement procedure. For purposes of thecountry. The involvement of the foreign tax authority inevitably adds discussion in this section, an APA is not intended to include a unilateraladditional time to the period for finalizing a MAP APA relative to a arrangement except where specific reference to a unilateral APA isunilateral APA. made.” Annexure AOECD guidelines also says on types of APAs – Unilateral, bilateral ormultilateral APA is an agreement between a taxpayer and a taxing authority on anPara 4.129 – “Some countries allow for unilateral arrangements where appropriate transfer pricing methodology for a set of transactions over athe tax administration and the taxpayer in its jurisdiction establish an fixed period of time in future. The FB 2012 proposed to insert newarrangement without the involvement of other interested tax sections 92CC and 92CD in the Act, to be effective from 1st July 2012,administrations. However, a unilateral APA may affect the tax liability ofto provide a framework for APA under the Act and these sectionsassociated enterprises in other tax jurisdictions. Where unilateral APAs provide the following-permitted, the competent authorities of other interested jurisdictionsshould be informed about the procedure as early as possible todetermine whether they are willing and able to consider a bilateral 1. It empowers Board, to enter into an APA with any personarrangement under the mutual agreement procedure. In any event, undertaking an international transaction and such APA’s shallcountries should not include in any unilateral APA they may conclude include determination of the arm’s length price or specify thewith a taxpayer a requirement that the taxpayer waive access to the manner in which arm’s length price shall be determined.mutual agreement procedure if a transfer pricing dispute arises, and ifanother country raises a transfer pricing adjustment with respect to a 2. The Arms length Price (“ALP”) of any international transactiontransaction or issue covered by the unilateral APA, the first country isencouraged to consider the appropriateness of a corresponding covered under such APA, shall be determined in accordance withadjustment and not to view the unilateral APA as an irreversible the terms of APA and the provisions of section 92C or section 92CAsettlement.” which normally apply for determination of arm’s length price would be modified to this extent.Para 4.130 – “Because of concerns over double taxation, mostcountries prefer bilateral or multilateral APAs (i.e. an arrangement in 3. The APA shall be valid for such previous years as specified in thewhich two or more countries concur), and indeed some countries willnot grant a unilateral APA (i.e. an arrangement between the taxpayer agreement subject to a maximum period of five consecutiveand one tax administration) to taxpayers in their jurisdiction. The previous years.bilateral (or multilateral) approach is far more likely to ensure that thearrangements will reduce the risk of double taxation, will be equitable toall tax administrations and taxpayers involved, and will provide greater 3   
  • 5. 4. The APA shall be binding on the person and the revenue authorities, modified return so filed and normal period of limitation of completion in respect of the transaction in relation to which the agreement has of proceedings shall be extended by one year. been entered as long as there is no change in law or facts having bearing on such APA. 9. If the assessment or reassessment proceedings for an AY relevant to a FY to which the agreement applies has been completed before5. With the approval of Central Government, the Board is empowered the expiry of period allowed for furnishing of modified return ,the to declare, any APA to be void ab initio, if it finds that the agreement Assessing Officer shall, in a case where modified return is filed, has been obtained by the person by fraud or misrepresentation of proceed to assess or reassess or recompute the total income in facts. Once an agreement is declared void ab-initio, all the accordance with the APA and to such assessment, all the provisions of the Act shall apply to the person as if such APA had provisions relating to assessment shall apply as if the modified never been entered into. For the purpose of computing any period return is a return furnished under section 139 of the Act. The period of limitation under the Act, the period beginning with the date of of limitation for completion of assessment or reassessment is one such APA and ending on the date of order declaring the agreement year from the end of the financial year in which the modified return void ab-initio shall be excluded. However if after the exclusion of the is furnished. aforesaid period, the period of limitation referred to in any provision of the Act is less than sixty days, such remaining period shall be extended to sixty days.6. Where an application is made by a person for entering into such an APA, proceedings shall be deemed to be pending in the case of the person for the purposes of the Act7. The person entering in to an APA needs to furnish a modified return, for the previous years to which APA applies, within a period of three months from the end of the month in which the said APA was entered. The modified return has to reflect modification to the income only in respect of the issues arising from the APA and in accordance with it.8. Where the assessment or reassessment proceedings for an AY relevant to the FY to which the agreement applies are pending on the date of filing of modified return, the Assessing Officer shall proceed to complete the assessment or reassessment proceedings in accordance with the agreement taking into consideration the 4   
  • 6. Au uthor Rashi P Pilaniwala / Nandita Naruka a   S.P. Naggrath’ & Coo Delhi Office A-3 380, Defence Colony, New Delhi –24 C D Tel: +91-11-4980 0000 Telefax: 91 1-11-4980 0029 Email: spn@@spnagrath.coom Banggalore Office 616, Oxford Towers, Bang galore Tel: +91 1-80-25705494 4 Telefax: +91-80-329089 + 917 Email: spnbblr@spnagrath.com www.spnagrath.com 5  

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