The government should ensure appropriate staffing of APA teams to help clear the inventory of 900-odd cases
By Ashwin Vishwanathan
The year 2020—ravaged by the pandemic—is bound to go down as the year of uncertainty in so many different ways. The economic costs alone are expected to be significant. Governments are facing fiscal stress and uncertainty in the investment climate. Businesses continue to battle changes in their demand patterns and supply chains and consequently witness pressure on inter-company pricing policies and international structures. Transfer pricing remains a significant tax risk for corporates and this will only grow with increased enforcement, globally coordinated actions under the Base Erosion & Profit Shifting (BEPS) project of the OECD and trade-related changes. Any tax dispute is likely, therefore, to entail protracted resolution processes, costs, administrative time and effort, and potential reputational damage. Advance pricing agreements (APAs) are an efficient and beneficial way of mitigating these risks and obtaining certainty.
APAs involve discussing inter-company transactions with the tax administration on a proactive basis to agree on pricing terms and eliminate any subsequent controversy. They can be entered into for prospective periods and also cover historical years. For taxpayers, they carry the benefits of freedom from onerous documentation and tax authority audits, mitigating double tax in some cases and certainty for the business.
The government stands to gain through reduced disputes, redirection of scarce administration resources, collecting their fair share of tax and boosting the country’s attractiveness to investors by providing a definite and predictable policy regime.
India’s APA programme introduced in 2012 has been successful and appreciated by taxpayers and tax administrations globally. The APA annual report for 2018-19 released by the CBDT in November 2019 said 271 agreements yielding Rs 10,000 crore had been signed in six years of filings. These provided certainty for 1,779 years across taxpayers ending 890 litigations that would have otherwise ended up in courts in India. The last 12 months have seen additional APAs being signed. This has reinforced the government’s commitment to a non-adversarial tax regime.
The government should ensure appropriate staffing of APA teams to help clear the inventory of 900-odd cases. The pandemic necessitated travel restrictions and safety measures have limited physical site visits—a key element in the APA lifecycle. Virtual meetings and discussions could serve as an alternative to keep the process moving and expedite conclusion of cases. Swifter resolutions would help timely collection of taxes and reduce the burden on the domestic appeals machinery.
For taxpayers, APAs are even more relevant in these times because business-driven restructurings and changing transfer pricing policies can be a compelling reason to pursue APAs. With limited resources, companies can choose to invest in getting certainty through APAs as a cost-effective alternative to uncertain and long drawn litigation. For companies with existing APAs, suitable renegotiation of these becomes important to consider the impact of the external environment on the critical assumptions of the earlier agreement. In-progress APAs could be refined to include adjustments for the effects of the pandemic.
Having these conversations upfront with the APA office may be more effective than post facto analyses to defend during tax authority assessments. In India, unilateral APAs (agreements between the Indian taxpayer and the CBDT) constitute 82% of the caseload. In general, bilateral APAs (agreements between India and the foreign tax administration along with both parties to the intra-group transaction) may be preferred as they eliminate double tax, are more holistic and consistent globally.
The outcome in APAs have also been successfully used in domestic litigation before the tax tribunal to apply for years outside the APA if the facts are similar, thereby increasing the advantage of the APA beyond its covered period.
APAs are a credible example of how Indian tax authorities and taxpayers have collaborated to find solutions to vexing transfer pricing problems. It is important to sustain this momentum as it creates a win-win for all stakeholders and fosters certainty—a commodity with a very high premium in these uncertain times.
The author is tax partner, Transfer Pricing Group, EY. Views are personal