Advance Pricing Agreement
Overview of Indian Provisions
& Expectations
IFA Conference on International Tax
06-07, July 2012
Mumbai
Vishweshwar Mudigonda
Deloitte Touche Tohmatsu India Private Limited
Contents
• Transfer Pricing Disputes and Resolution mechanism
• Advance Pricing Agreement
‒ Basic Features
‒ Framework in India
‒ Potential Roadmap
‒ Benefits and Challenges
‒ Vital Factors for Success
• Key Takeaways
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Transfer Pricing Adjustments – Striking Numerals
Trend of adjustments over the years
• Seven years of transfer pricing audit completed – the trends indicate greater
scrutiny, leading to increased adjustments and resultant litigation
• Facts and figures
Cases
adjusted (%)
Estimated
addition (in
Crores)
Asst year
No of cases
Cases
adjusted
2002-03
1061
239
23%
1,220
2003-04
1501
337
22%
2,287
2004-05
1768
471
27%
3,432
2005-06
1945
754
39%
1,614
2006-07
1830
813
44%
10,908
2007-08
2301
1,338
49%
23,237
2008-09
2638
1,343
52%
44,531
Source: White Paper on Black Money from Finance Ministry, May 2012
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
Historic TP Dispute Strategies Based on Unilateral
Options
Transfer Pricing Documentation
Local Country Examination
Appeals
Litigation
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Recent TP Controversy Strategies Based on Bilateral
Options
Transfer Pricing Documentation
Local or Multiple Country Examination
Mutual Agreement Process (Competent
Authority)
Bilateral APAs
Treaty Arbitration
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
APA – Basic features
• Binding contract with one or more tax authorities
‒ Covers specified intercompany transactions, pricing methods, and range of
target results
‒ Generally five-year term (with rollback option) and can be renewed
• “Critical Assumption” clauses allow renegotiation in the event of changed
circumstances
‒ Protects taxpayers from having to comply with a “bad deal” caused by material
changes affecting their business
‒ Taxpayers have input in drafting critical assumptions
• Negotiations with tax authority APA/MAP specialists rather than examination
teams
• Voluntary process – provides taxpayers with principled and non-adversarial
alternative to resolving disputes
• Provides transfer pricing certainty, eliminate potential double taxation
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
APA – Legislative Framework (1/2)
• APA to be effective from 1July 2012
• Board is empowered to enter into an APA
• To cover prospective transactions
• Could cover determination of arm’s length price (ALP) or specify the manner in
which ALP is determined
• ALP may be determined under any method whether prescribed or not
• Validity – Maximum period of five years
• Legally binding on both parties, except in case of any change in law or fact
Board to prescribe detailed rules, forms and procedure
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
APA – Legislative Framework (2/2)
• APA to be void in case of fraud or misrepresentation –regular provisions apply
• Tax authorities get additional time, in case APA is declared void
• Modified return have to be filed within three months for the past years covered
under the APA
• Assessments / reassessments for the years covered in APA have to be
completed in accordance with the APA
• Reporting Compliances during covered period
Pending APA – Compliance and audit to continue
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
APA Process – Potential Roadmap
Phase 1:
APA Planning
• APA strategy
• Fact gathering
and analysis
• Economic
analysis
Phase 2:
Pre-filing
• Prepare prefiling
documents
• Pre-filing
meetings with
tax authorities
Phase 3:
APA
Submission
• Prepare and
file APA
request
/submission
• Acceptance
letter
Phase 4:
PostSubmission
Process
Phase 5:
Drafting and
Compliance
• Receive/Reply
to tax authority
questions
• Finalize APA
and sign
agreements
• Second, third
round
questions
• Adjustments
and APA
annual reports
• Meetings with
tax authorities
• Site visits
• Position Paper
• MAP
negotiations
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© 2012 Deloitte Touche Tohmatsu India Private Limited
APA Phase 1: Planning
• Establish Transfer Pricing goals
• Prepare sound TP analysis
‒ Covered transactions
‒ Function and risk analysis
‒ Economic analysis
• Team building, information readiness
‒ Team with your internal stakeholders and with your external advisors
‒ Leading practice: Internal project champion, liaison to business units
‒ Prepare your “information supply chain,” go-to information contacts
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
APA Phase 2: Prefiling Conferences
• Pre-filing meetings allow taxpayers to informally obtain tax authority feedback
before formally committing to the APA process
‒ May be on a named or anonymous basis
‒ May request more than one meeting as TP analysis is refined
• Goal - defines Transfer Pricing Methodology feasibility
• Tax authority informal feedback only a beginning, does not assure outcomes
• Sets a cooperative tone and builds relationship with the APA team
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
APA Phase 3: APA Submission
APA submission content
• Begins with, but may not end with your transfer pricing documentation
• Often requires different information, different focus
‒ Documentation looks back, APA forward (and back w/ rollback)
‒ Looking at OECD Guideline perspective and home country perspective
‒ Providing CA analysts negotiation alternatives
• On-point evidence and organization are crucial
‒ More is not better: On-point evidence crucial and builds credibility
‒ Well-organized submissions read first, started earliest, easiest to process
‒ Well-organized submissions mean fewer follow-up information requests
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
Phase 4: Post-Submission Process (Due Diligence)
• APA due diligence by the respective tax authorities
‒ Follow-up factual questions
‒ Site-visits
‒ Discuss proposed TP method
‒ Some of the above steps can be done jointly with both tax authorities
• Use case plans to keep the case moving
‒ Contains due diligence milestones for both the taxpayer and tax authorities
‒ Due dates are negotiated / flexible to accommodate business needs
‒ Importance of keeping on schedule to keep case moving
• End result – preparation of negotiating position paper
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
Phase 4: Post-Submission Process (MAP Negotiations)
• Ultimate bilateral resolution is found in the Mutual Agreement Procedure (MAP)
process
‒ Government-to-government negotiations
‒ Results in a bilateral “Mutual Agreement” covering the terms of the APA
• Managing the MAP process
‒ Communicate with both sides frequently
‒ Getting on next MAP meeting schedule
‒ Support both sides with information needed, clarifications
‒ Propose settlement options
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
Phase 5: Drafting the APA and Compliance
• Drafting the contract with both tax authorities
‒ Boilerplate APA
‒ Understanding adjustment mechanisms
• Annual reports to demonstrate compliance with APA
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
APA – Benefits and Challenges
Key Benefits
•
•
•
•
•
•
•
•
•
•
•
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A go forward TPM for at least 5 years
Rollback to open audit years possible
Significantly reduce penalty risk
Defers potential assessments and related
cash outlays
Provides certainty not otherwise available
Generally more objective / experienced APA
teams – avoid the “aggressive” auditor
syndrome
Entry into APA process reduces involvement
of a local tax authority office and forces it to
accept the APA methodology
Greatly reduced TP compliance and audit
defense costs
Simplifies financial reporting process
Possibility of renewal at reduced cost
More latitude to negotiate with APA team in
order to obtain bilateral agreement
Potential Challenges
• An APA may focus scrutiny on other
transactions in the structure and other
issues
• Current transfer pricing policy may be
perceived as too high or too low and could
be reduced under an APA;
• No guarantee that proposed methodology
will be agreed to
• Potential requirement to provide more
information upfront
© 2012 Deloitte Touche Tohmatsu India Private Limited
APA – Vital factors for Success
• Transparency and open minded approach during negotiation, both by tax
authorities and tax payer
• Should embrace both unilateral and bilateral APA
• No limiting criteria for applicants of APA
• Nil or nominal formal filing fee
• Timely conclusion of APA – 6/9 months for unilateral and 12/24 months for
bilateral
• Provide for roll back option
• Relief from compliance requirements
• Confidentiality of information must be maintained
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
Key Takeaways
• Provides certainty – reduces litigation
• Facts to be true and complete to the extent possible
• Offers greater flexibility in determining arm’s length price and latitude to negotiate
• Critical assumption to mitigate risk of major unforeseen events
• Co-operation rather than conflict leads to Win-Win approach
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© 2012 Deloitte Touche Tohmatsu India Private Limited.
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