The Indian APA programme was introduced in 2012; it was designed to bring in positive changes in the Indian transfer pricing (TP) regime, and was perceived globally as highly aggressive. It aimed at reducing TP litigation by making tax authorities and taxpayers work in collaboration. The objective of an APA is to provide tax certainty for cross-border transactions by encouraging taxpayers to present all the relevant facts before the tax authorities to arrive at mutually acceptable transfer pricing methodology (TPM).
The signing of five unilateral APAs by Indian revenue authorities and providing certainty of inter-company pricing to multinational enterprises (MNEs) for five yearsFY13 to FY18will go a long way in creating positivity in the Indian investment climate. This is especially so when Indian revenue authorities have been publicised as being aggressive due to recent high profile adjustments made to the values of transactions like equity infusion by overseas MNEs in their Indian subsidiaries and advertisement spends.
Is the response from the companies encouraging
The number of applications filed in the latest round of APA has been even higher. Such response could be an outcome of reasons such as: (1) aggressive approach adopted by the revenue authorities during TP audits resulting in significant adjustments; (2) the safe harbour rates being set very high and having failed to attract taxpayers; and (3) pragmatic, rational and business-like approach of Indian APA authorities with determination to make the programme successful.
It is, therefore, important to learn from the past years experiences and imperative for the taxpayers and the Indian revenue to gear up to make the Indian APA regime one of the most effective.
How should a taxpayer prepare to seek an APA
A taxpayer should smartly choose the APA option depending on the structure of his business and countries involved in the transaction. It is important that the decision to take the APA route is taken at an appropriate time so there would be sufficient time-period to prepare to take on the discussions with the APA authorities. The following parameters need due consideration for speeding up the process before proceeding to file an APA application:
*Preparation and evaluation of alternate options and a robust TP policy aligned to the commercial substance and documenting the same by way of inter-company agreements;
*Adherence to TP policy with a strong back-up documentation distinctly depicting functional and economic analysis;
*Documentation or information to be shared with authorities;
*Availability of robust financial projections;
* Business teams of the taxpayer need to get involved; site visits by APA authorities would be incomplete or futile unless business teams are fully involved;
*Creating contingencies and scope for accommodating future organisational or operational structure consequent to merger, demerger or restructuring;
* Negotiating objectively in a skilled manner by experts;
* In the case of a unilateral APA, it would be important to test the acceptance of the same in the overseas jurisdiction;
* In case of bilateral or multilateral APAs, ensure that the taxpayer and related party present a consistent case to the relevant competent authorities; and
* Finally, an alternative plan of action is required in case the APA is not being concluded.
Also, failure to comply with critical assumptions may make an APA unworkable. Indian regulations do not provide any specific list of critical assumptions, hence taxpayer and the APA authorities should carefully consider which all critical assumptions should be included in the agreement; for example, those relating to business structure, business operations or expected business volume. It is also important for revenue authorities to effectively handle the APA process given the overwhelming number of applications.
What kind of steps can ensure speedy disposal of applications and instil taxpayers confidence
Several steps need to be taken both by the income-tax department and the companies.
* APA authority should build a large team and include amongst them subject-matter experts;
* The mindset of the current APA officers has to be shared with the new set of incumbents;
* Timing is the essence;
* There has to be an enabler built into the regulations permitting for roll-back of APAsroll-back refers to application of the APA position relating to TPM to similar international transactions to the periods prior to APA;
* As in countries like the US, there could be special provision made out to handle the APA requirement of SMEs.
Further, during the term of the APA, the taxpayers are required to file annual compliance reports with the tax department, which would be subject to limited audit by the revenue officers. It is important to see whether the revenue officers are able to comprehend the nuances of the APAs signed and limit their inquiries to important aspects only, so as to enable the taxpayers to see the benefits of the regime after going through the APA process. This will eventually help in boosting investor confidence, thereby benefiting the Indian economy.
Rohan K Phatarphekar
The author is partner & national head, Global Transfer Pricing Services, KPMG in India. Views are personal