By R. Subhashree
India recently notified the rules for Advance Pricing Arrangement (APA). Though originally part of the Direct Taxes Code (DTC), APA has been implemented now. It comes shortly after the recommendation of the committee on GAAR which has suggested tweaking of rules to make them more investor friendly. India is often described as a place where transfer pricing is difficult. APA is a dispute mitigation mechanism which helps assessees to ensure compliance and prevent transfer pricing audit/penalty and litigation. APA is said to usher in certainty in tax. If one looks at the number of instances, APA scheme has been fairly successful in USA, Australia and Japan.
Like transfer pricing provisions which are broadly in line with OECD guidelines, the new APA provisions also largely follow the pattern/ procedure found in developed economies. An APA once signed will be in force for an agreed period. The new scheme provides for pre-filing consultation, filing of application, submission of documents and information, negotiation to arrive at an acceptable transfer pricing method, agreed period for which APA will be applicable and contains provisions for revocation.
Given the fact that countries like Australia and China do not charge any application fee, it has been argued that the application fee fixed under the Indian APA provisions is quite high, ranging from Rs. 10 lakhs to Rs, 20 lakhs based on the amount of international transaction entered into or proposed to be undertaken. The application fee will not be refunded in case the applicant withdraws application. Finalising an APA has many cost components like gathering data, expert advice, negotiations and so on. A company may not risk failing an APA application because it will be incurring cost and could, in addition face a transfer pricing audit. Under Rule 10K of the Income-tax Rules, 1962, an applicant is afforded an opportunity to present his case to the competent authority before the application is rejected.
The normal apprehension of companies to part with data and the possible use of the data against them, has not been specifically addressed in the newly inserted rules. However, this is a feature of any APA and of even advance rulings. In his discussion paper ‘Resolving legal uncertainty: The unfulfilled promise of advance tax rulings’, Yehonatan Givati states that ‘corporations may refrain from requesting an advance pricing agreement, since in order to obtain an agreement they need to disclose details of their business operations, thus “red flagging” ambiguous tax issues to be considered by the IRS. These tax issues may remain undetected in a regular audit.’ [Discussion Paper No. 30 (6/2009), Harvard Law School].
The APA rules empower tax authorities to revoke the agreement on the ground of fraud or misrepresentation of facts. Also as per Rule 10R the agreement may be cancelled in case of failure to file annual compliance report, material errors in annual compliance report or finding of any failure to comply with the terms of the agreement. The provisions require compliance with principles of natural justice like offering personal hearing and providing reasons for cancellation in writing.
A common criticism against APA Scheme is that it offers a method for private parties to contract with tax authorities and pre-empt problems. It is not by itself a solution to the larger issue of transfer pricing. Dr. Kerrie Sadiq in his paper ‘The taxing effects of the Advance Pricing Arrangement Program: A review of APAs and their impact on stakeholders' [Journal of Australian Taxation, (2007) 10(1) 105] states that 'disparity of tax treatment between participants and non-participants is clearly in conflict with the fundamental principle of equitable treatment of taxpayers’. An assessee who is not able to or chooses not to finalise an APA will have to prepare himself for greater scrutiny and additional compliance costs.
The Indian APA provisions do not provide for retrospective application, that is extending the agreement reached to transactions prior to the period of agreement. An assessee already facing audit or likely to face audit may try to enter into an APA and could be refused. There is provision for renewal of the agreement as per Rule 10S. Such renewal will be treated as a new application for agreement, using the same procedure as outlined in these rules except pre-filing consultation provided for in Rule 10H.
The APA rules provide for unilateral, bilateral and multilateral APA. Though bilateral and multilateral APAs are purported to be more useful in tackling the problem of double taxation and harmonising transfer pricing, it is in practice quite difficult. For instance Glaxo Smithkline settled a 14-year dispute with the IRS (USA) by paying over $3 billion which was a substantial part of the amount disputed. Despite provisions for tri-partite discussion between the company and the revenue authorities in the U.S. and the U.K., and reaching an agreement with the U.K. on transfer pricing, resolution was not easy.
Certainty in tax and mutual trust between tax payer and collector are utopian ideals. However, the APA rules appear to be fair and provide an option to the assessee for compliance through cooperation.
[The author is a Manager, Knowledge Management Team, Lakshmikumaran & Sridharan, New Delhi]
India recently notified the rules for Advance Pricing Arrangement (APA). Though originally part of the Direct Taxes Code (DTC), APA has been implemented now. It comes shortly after the recommendation of the committee on GAAR which has suggested tweaking of rules to make them more investor friendly. India is often described as a place where transfer pricing is difficult. APA is a dispute mitigation mechanism which helps assessees to ensure compliance and prevent transfer pricing audit/penalty and litigation. APA is said to usher in certainty in tax. If one looks at the number of instances, APA scheme has been fairly successful in USA, Australia and Japan.
Like transfer pricing provisions which are broadly in line with OECD guidelines, the new APA provisions also largely follow the pattern/ procedure found in developed economies. An APA once signed will be in force for an agreed period. The new scheme provides for pre-filing consultation, filing of application, submission of documents and information, negotiation to arrive at an acceptable transfer pricing method, agreed period for which APA will be applicable and contains provisions for revocation.
Given the fact that countries like Australia and China do not charge any application fee, it has been argued that the application fee fixed under the Indian APA provisions is quite high, ranging from Rs. 10 lakhs to Rs, 20 lakhs based on the amount of international transaction entered into or proposed to be undertaken. The application fee will not be refunded in case the applicant withdraws application. Finalising an APA has many cost components like gathering data, expert advice, negotiations and so on. A company may not risk failing an APA application because it will be incurring cost and could, in addition face a transfer pricing audit. Under Rule 10K of the Income-tax Rules, 1962, an applicant is afforded an opportunity to present his case to the competent authority before the application is rejected.
The normal apprehension of companies to part with data and the possible use of the data against them, has not been specifically addressed in the newly inserted rules. However, this is a feature of any APA and of even advance rulings. In his discussion paper ‘Resolving legal uncertainty: The unfulfilled promise of advance tax rulings’, Yehonatan Givati states that ‘corporations may refrain from requesting an advance pricing agreement, since in order to obtain an agreement they need to disclose details of their business operations, thus “red flagging” ambiguous tax issues to be considered by the IRS. These tax issues may remain undetected in a regular audit.’ [Discussion Paper No. 30 (6/2009), Harvard Law School].
The APA rules empower tax authorities to revoke the agreement on the ground of fraud or misrepresentation of facts. Also as per Rule 10R the agreement may be cancelled in case of failure to file annual compliance report, material errors in annual compliance report or finding of any failure to comply with the terms of the agreement. The provisions require compliance with principles of natural justice like offering personal hearing and providing reasons for cancellation in writing.
A common criticism against APA Scheme is that it offers a method for private parties to contract with tax authorities and pre-empt problems. It is not by itself a solution to the larger issue of transfer pricing. Dr. Kerrie Sadiq in his paper ‘The taxing effects of the Advance Pricing Arrangement Program: A review of APAs and their impact on stakeholders' [Journal of Australian Taxation, (2007) 10(1) 105] states that 'disparity of tax treatment between participants and non-participants is clearly in conflict with the fundamental principle of equitable treatment of taxpayers’. An assessee who is not able to or chooses not to finalise an APA will have to prepare himself for greater scrutiny and additional compliance costs.
The Indian APA provisions do not provide for retrospective application, that is extending the agreement reached to transactions prior to the period of agreement. An assessee already facing audit or likely to face audit may try to enter into an APA and could be refused. There is provision for renewal of the agreement as per Rule 10S. Such renewal will be treated as a new application for agreement, using the same procedure as outlined in these rules except pre-filing consultation provided for in Rule 10H.
The APA rules provide for unilateral, bilateral and multilateral APA. Though bilateral and multilateral APAs are purported to be more useful in tackling the problem of double taxation and harmonising transfer pricing, it is in practice quite difficult. For instance Glaxo Smithkline settled a 14-year dispute with the IRS (USA) by paying over $3 billion which was a substantial part of the amount disputed. Despite provisions for tri-partite discussion between the company and the revenue authorities in the U.S. and the U.K., and reaching an agreement with the U.K. on transfer pricing, resolution was not easy.
Certainty in tax and mutual trust between tax payer and collector are utopian ideals. However, the APA rules appear to be fair and provide an option to the assessee for compliance through cooperation.
[The author is a Manager, Knowledge Management Team, Lakshmikumaran & Sridharan, New Delhi]