E CONOMICS OF ‘A DVANCE P RICING A GREEMENTS ’ (APA S ) Bhopal|16 January 2016 S ANJAY S ANGHVI

ECONOMICS OF ‘ADVANCE PRICING AGREEMENTS’ (APAS)

Bhopal | 16 January 2016

SANJAY SANGHVI

Copyright © Khaitan & Co 2016 | 2

CONTENTS

1. Background of APAs2. Genesis of APAs

Objective of APA scheme Meaning of APA

2. Types of APA3. Key Features of APAs

Eligibility to enter into APA Scope Binding Effect Validity Period Rollback Provisions

4. Stages of APA5. Changes to an APA6. International Perspective 7. Implications/Some Comments


BACKGROUND Transfer Pricing • Specific regime for tax on transactions between ‘associated enterprises’ (AEs)• AEs

o A Co. participating directly or indirectly or through one or more intermediaries in the management, control, or capital of B Co.o A Co. & B. Co have common parent o A Co. holds directly or indirectly 26% or more of voting power of B Coo A Co. guaranteeing 10% or more of borrowed capital of B Co.o A Co. appoints 50% or more of Board of directors of B Co., or 1 or more executive directors of B Co.

• Legal fiction- transaction between AEs as if they are independent parties.

• Income from ‘international transaction’ to be computed on ‘Arm’s Length Price’ (ALP) basis

• ‘International Transaction’ means a transaction between two or more enterprises either or both of whom are non-residents

• ALP means price applied/ proposed to be applied between persons other than ‘associated enterprises’ in uncontrolled conditions

Significance• Huge tax litigation on account of Transfer Pricing (TP) (ALP or manner of determination of ALP)

• Approximately 60% of tax disputes globally are on account of TP

APA regime intends to attack root cause of TP disputes to provide ‘tax certainty’


GENESIS

Purpose of introducing APA scheme

• FM’s Budget Speech 2012- APA introduced to bring down tax litigation significantly and provide tax certainty to foreign investors

• To provide ‘certainty’ and ‘unanimity’ of approach in determining ALP of ‘international transactions’

• Thus, to reduce tax litigation on account of TP APA

• An agreement between ‘tax payer’ (resident/non-resident) and CBDT determining ALP or manner of determination of ALP.

Change in Tax Law

• Finance Act 2012 introduced section 92CC & section 92CD in IT Act to enable CBDT to enter into APAs.

• Key features contained in section 92CC & section 92CD of the IT Act lays out eligibility, scope, binding effect, validity period of APAs

• Power delegated to CBDT to prescribe form, manner, and procedure for entering into APA.


Types of APA

Unilateral

- Involves ‘taxpayer’ and CBDT

-With the approval of Central Government

Bilateral

- Involves ‘taxpayer’ its ‘associated enterprise’, CBDT and foreign tax authorities

- Competent Authorities of India and foreign state involved

Multilateral

- Involves Multiple Parties: ‘taxpayer’, two or more ‘associated enterprise’ and relevant tax authorities in different countries. - Multiple authorities including CBDT and foreign authorities (where associated enterprises are located) e.g. Internal Revenue Service (IRS) in US.

Statistics As on December 11, 2015 31 APA’s signed of which 30 Unilateral, and 1 bilateral.

(Source: Press Information Bureau)


KEY FEATURES Eligibility for APA [Section 92CC & Rule 10F]

• Person who has entered into an international transaction

• Person proposing to undertake international transaction

Scope of APA

• APAs include determination of ALP or specifies the manner in which ALP is to be determined;

• ALP can be determined as per any method prescribed under section 92C for determination of ALP along with necessary adjustments and variations. [section 92CC(2)]

Binding effect of APA

• APA is binding on the person entering into international transaction (taxpayer) and the CIT (including income-tax authorities subordinate to him)

• Binding only in respect of transaction in relation to which the APA has been entered into

• Not binding if there is change in law or facts having a bearing on such APA. [section 92CC(6)]


KEY FEATURES…

• CBDT empowered to declare an APA as void ab initio if APA has been obtained by fraud or misrepresentation of facts. [section 92 CC(7)]

• Non-compliance with terms of APA including ‘critical assumptions’ may lead to cancellation of the APA.

• Transactions covered under APA not subject to regular audit by Transfer Pricing Officer (i.e TP assessment proceedings).

Validity Period

• Valid for a period specified in APA, but not to exceed 5 consecutive financial years [Section 92CC(4)]

• APA can be extended/renewed for further period of upto 5 yearsApplication for APA can be withdrawn anytime before finalisation of terms of APA


…KEY FEATURES Rollback of APA [Section 92CC (9A)]

• Rollback of APA can be for applying APA to ‘international transaction’ already undertaken 4 preceding financial years[Rule 10MA and Rule 10RA]

• Procedure contained in Rule 10RA

o Pending Appeal (to the extent, it covers APA) to be withdrawn both by applicant and tax department

• Rollback available only -

o In respect of ‘same’ international transaction to which APA applies

o If return for rollback year has been furnished by the applicant before due date

o If Rollback requested for all the years in which said international transaction has been undertaken by the applicant.

o TP Report in respect of such international transaction furnished in accordance with section 92E

• Rollback not available if-

o Determination of ALP for said year (for which rollback is sought) has been subject matter of appeal before ITAT and such appeal has been disposed of before signing of APA; or

o Rollback has effect of reducing taxable income or increasing loss declared in the tax return for that year.


STAGES OF APAAPA Process

Key to success of APA Program• Proper functional analysis • Determination of TP methodology, • Examination of ‘critical assumptions’ • Specify manner in which ALP is to be determined

Pre-filing consultation Application

Preliminary processing of application

Amendment to application

Finalisation of terms of the

APA


…STAGES OF APA Pre filing Consultation [Rule10H]

• Any person proposing to enter into APA to apply for pre filing consultation with Director General of Income Tax (IT) [Form 3CEC]

o To assess the possibility of entering into an APA

• Mandatory to have a Pre filing consultation before filing APA application

• APA team of CBDT to hold Pre-filing consultation to-o Determine nature & scope of APAo Identify transfer pricing issues like FAR analysiso Discuss broad terms of APAo International transaction to be coveredo Proposed TP method (CUP/TNMM etc.)

• Understanding reached in pre filing consultation to be reduced in writing

• Pre filing consultation not to obligate CBDT or taxpayer to enter into APA

• Pre filing consultation not to deem that taxpayer has applied for APA


CHANGES TO AN APA Revision of APA [Rule 10Q]

• An APA may be revised by CBDT either suo moto or on request of assessee or competent authority or DGIT (IT)

• APA may be revised on account of- o Change in critical assumptionso Change in law that modifies matter covered by an APA (change in law governing non

binding nature not covered) o Request from competent authority of foreign country to revise APA in case of bilateral or

multilateral APA

• Revision at the request of assessee may be rejected by CBDT, reasons to be provided in writing.

• Revised APA to include date till which original APA is to apply and date from which revised is to apply.

Renewal of APA [Rule 10S]

• Request for renewal to be made as new application

• Procedure for new application apply except pre filing consultation


…CHANGES TO AN APA Cancellation of APA [Rule 10R]

• An APA could be cancelled on account of-

oFailure to comply with terms of APAoFailure to file annual compliance report oMaterial errors in annual compliance report oNo consensus on the terms of the revised APAoEffect cannot be given to rollback provision of an APA due to failure on the

part of applicant.

• Cancellation order should-

o Record reasons for cancellationo Follow principles of natural justice o Specify effective date of cancellation

• Order of cancellation of APA to be communicated to-

o Assessing Officer, Transfer Pricing Officer o Foreign tax authorities in case of bilateral or multilateral APA


INTERNATIONAL PERSPECTIVE USA

• APA regime since 1991, specific APA team in IRS.

• APA Program merged with U.S. Competent Authority (USCA) that resolves transfer pricing cases under the mutual agreement procedures of the United States’ bilateral tax treaties.

• Information collected in APA process deemed as “tax return information” thus no loss of any confidential information.

• Annual reports disclosing various details relating to APA and MAP for general information to the public.

United Kingdom

• ‘Rollback’ facility available

• Her Majesty Revenue and Customs (HMRC) recommends having bilateral APA

• Even on receipt of unilateral APA, HMRC may communicate with the other Administration (where tax treaty exists) to ascertain entering into a bilateral APA process unless

- Unnecessary delay caused due to bilateral process- No APA process in other jurisdiction

• Alternatively, HMRC’s ability to give effect to a mutual agreement reached with a treaty partner to eliminate double taxation under the terms of a treaty will not be restricted by the terms of a unilateral APA.


IMPLICATIONS/SOME COMMENTS

Efficiency in reducing transfer pricing related disputes MAP versus APA

• MAP wider recourse covering all issues under tax treaty• No rollback of APA for an year for which MAP is concluded• For pending MAP request for any year under rollback of APA- either MAP or

rollback to be chosen by taxpayer• Cases of economic taxation cannot be admitted under bilateral APA unless

MAP Article exists in a tax treaty. Some Concern

• Business Information shared with APA team during APA procedure can be shared with field officers

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E CONOMICS OF ‘A DVANCE P RICING A GREEMENTS ’ (APA S ) Bhopal|16 January 2016 S ANJAY S ANGHVI