Transfer pricing adjustments by revenue authorities are touching new highs each succeeding audit year, garnering nearly Rs 70,000 crore in the latest round.
Realising the need for effective and alternative dispute resolution mechanism, Finance Act 2012 introduced the Advance Pricing Agreement provisions in the income-tax law, followed by a detailed APA scheme effective from August 30, 2012.
An APA between the Central Board of Direct Taxes (CBDT) and any person determines the arm’s length price (ALP) or specifies the manner in which the ALP would be determined for the international transactions of that person.
It seeks to eliminate uncertainty and aid effective planning of transfer pricing by multinational corporations having operations in India.
The CBDT recently issued a comprehensive APA guidance booklet with FAQs under the Taxpayers Information Series. The APA scheme has received a good response from MNCs, with more than 140 applications filed in the first year itself. The APA booklet is a welcome move by the Government, offering guidance on the types of APAs (unilateral, bilateral and multilateral), the Government APA team, advantages of APA, the detailed process from pre-filing stage to the actual signing, the disclosure obligations of the applicants, withdrawal of an APA, renewal of APA, conversion of unilateral APA into bilateral and vice versa, and so on.
An important guidance relates to the pre-filing consultation phase, which is the first step for MNCs exploring the APA route.
The booklet clarifies that at the end of the pre-filing consultation (mandatory in all cases), the understanding reached on various issues shall be documented by the APA team and a copy provided to the applicant, which will form the basis of the formal APA application, although not binding on the APA team.
The expected timeline for concluding the agreement can also be discussed with the APA team.
The booklet also clarifies CBDT’s intent to include experts in specialised subjects like economics, statistics and law in its APA team.
This is a positive move as the advance price determination for international transactions, foreseeing various macro- and micro-level factors, is a challenging exercise and the inclusion of experts would lend credibility and a scientific basis to the ALP determination. It is clarified, however, that experts from other Government departments would be roped in as needed.
CBDT has clarified that taxpayers can initially file a unilateral APA (that is, agreement only with the Indian revenue administration) and later convert it to bilateral (that is, agreement with the tax administration of the other contracting country under the Double Tax Avoidance Treaty).
The only challenge, according to the booklet, is that it would not be possible to enter bilateral APAs with countries that do not have article 9(2) in their Double Tax Avoidance Treaties similar to the OECD/ UN Model tax convention enabling corresponding adjustments and the competent authority dialogue.
This clause is available in tax treaties signed by India with countries like China, Japan, the UK, the US, Australia and others, but not available in treaties with other significant trade partners like Germany, Singapore, Italy and so on.
While there could be some qualms in some quarters on the absence of ‘firewall provisions’ or parallel administrative procedures during the period the APA is not signed, these are outweighed by the savings in time and effort for an MNC by averting long-drawn transfer pricing litigation, tax demands, interest and penal consequences.
The APA renewal process, after its maximum initial tenure of five years, would also be quicker, promising to turn the first APA application into a long-term investment for corporates.
Kingsly Jebas,Manager,Transfer Pricing Services contributed to the article.
The author is Partner — Transfer Pricing Services, Grant Thornton India LLP