Though every APA is different, as it is an agreement between the concerned company and the revenue department, the CBDT has developed a model APA template, which is currently being vetted by the law ministry, to expedite the whole process. Once the APAs are given final shape, each one of them will have to be approved by the finance minister. Clearly, these agreements will remain the final word for taxation of transactions of the companies signing APAs with related entities for the next five years. For the MNCs reeling under high-handed TP adjustments in the last few years, this window is expected to be a big solace.
The numbers pertaining to the TP adjustments till FY13 clearly indicate why a successful APA mechanism is a must in India. While additions to the income of MNCs were made in 49% of the cases totalling R23,237 crore in FY11, the numbers shot up to 53% and R45,385 crore in FY12. And in FY13, the TP adjustment again rose by 54% to R70,016 crore, which included high-profile cases like Microsoft and Maruti. The FY14 TP orders are expected in the first week of February. The APA discussions will certainly have their impact on the TP adjustments, and in turn litigations. Once an APA is signed, the company concerned and the tax authorities would handle the transactions done during the specified period, according to the agreed framework.
In total, 150 APA applications have been filed since its introduction in 2012119 unilateral and 31 bilateral ones. The unilateral APAs normally take between six months and one year to conclude and are between the company and the revenue authority of the concerned country, and bilateral APAs taking about two years to get done are between the company and the two countries of its operation.
Bilateral and multilateral APAs can be entered only with countries whose tax treaty with India has provisions for TP adjustments. An application for a unilateral APA may be converted into a bilateral or a multilateral one and the companies can file unilateral APA applications for some transactions and bilateral or multilateral for others.
Of the 31 applications filed for the bilateral APAs, Japan and the UK are part of a majority of them, and there are a few cases involving the US also. The interest shown by the MNCs in APAs clearly indicates that the number of applications could rise substantially in the next financial year as the applications will again start coming in March.
The interesting part is that APAs can pave the way for resolution of about 100 TP cases involving the US companies which have opted for the Mutual Agreement Procedure (MAP) as about 70 of them have already filed for unilateral APAs. As the Indian and the US tax authorities are in the process of finding a mechanism for solving these cases, these unilateral APAs are likely to be turned into bilateral APAs going ahead.
While there is a considerable progress on the APA turf, another window for curbing disputes in TP, safe harbour, has failed to attract the companies. The industry stood up vehemently against the reckless TP additions made by the income tax department in FY12 and FY13 against MNCs operating in India; the government first offered APAs in 2012 and then safe harbour rules (SHRs) in 2013 to them. However, the response to SHRs has been dismal with only 30 applications, mostly from Mumbai and Bangalore. The high profit margins, in 20-30% range, have played the spoilsport.
Take the case of contract R&D in the IT sector. The Rangachary panel took the middle path by fixing 30% as profit marginto balance the base rate of 20% and profit margins of some of the companies of as high as 50-60%. The panel had noted that high variations in the margins declared by the companies (16.28% being the highest and 4% being the lowest) and also in the margins determined by the TPOs (108.02% being the highest and 5.67% being the lowest) were not conducive for fixing the SHR margins. Clearly, even the 30% margin is not working here.
The finance ministry is now all set to take corrective action in the coming months to make these margins attractive. The idea is to utilise both APA and SHR effectively as while the former is more suitable to the bigger companies, the latter will attract the companies that would not be willing to bear the cost and time burden of APAs.
All told, there is no doubt that the TP taxation environment has improved considerably in the last one year and this is a good beginning for making the business milieu more transparent and friendly for the MNCs. Now, it would be interesting to watch whether there is a change in the approach in making TP adjustments this year when the orders are out in the next few weeks.