28 May 2013 Global Tax Alert News and views from Transfer Pricing Indian Government releases Advance Pricing Agreement Guidance Booklet Executive summary To bring about certainty and uniformity with regard to determination of the arm’s length price of an international transaction, the Indian Finance Act 2012 introduced provisions to enable Advance Pricing Agreements (APAs) in the Indian Tax Law (ITL). The Central Board of Direct Taxes (the Board) thereafter issued the rules for implementing the APA program on 30 August 2012.1 Since the APA is a new program, to increase awareness of the taxpayers about the APA program and its implementation, the Board has released a booklet called the APA Guidance Booklet with FAQs (APA Guidance). The APA Guidance deals with the procedure to be followed by a taxpayer and the tax authorities before a taxpayer can enter into an APA. The FAQs section in the APA Guidance provides clarifications on certain general issues raised by the taxpayers with regard to the APA process, disclosure requirements in the application, critical assumptions, detailed functions performed, assets employed and risks assumed (FAR) analysis, conversion of a unilateral APA to a bilateral/multilateral APA, amendment/renewal/withdrawal of an APA, profit attribution to Permanent Establishments (PE) and the impact of an APA on the actions of the Assessing Officer/Transfer Pricing Officer. The FAQs section of the Guidance also provides clarifications on the procedural and documentary information required to be provided to the APA authorities. Advance Pricing Agreement Guidance with FAQs An APA is an agreement between the Board and the Taxpayer that determines, in advance, the arm’s length price (ALP) or the manner of the determination of the ALP (or both), in relation to an international transaction. The salient points of the APA Guidance are provided below: Pre-filing consultation • The request for pre-filing consultation should include the global structure of the Taxpayer’s Group preferably in the form of flow charts/diagrams and a FAR analysis of the applicant and the associated enterprise(s). In an anonymous request, the Taxpayer’s Group structure could be omitted; however a detailed explanation of the subject international transaction and the FAR analysis needs to be provided. • Pre-filing understanding would not only be restricted to determining the scope of the agreement, identifying transfer pricing issues, determining suitability of international transaction for the agreement and discussing broad terms of the agreement, but could also include any other relevant issue. • If the taxpayer has more than one international transaction, the taxpayer cannot be compelled to enter into an APA for all the international transactions. However if one transaction is intrinsically linked with another international transaction in a manner that they cannot be benchmarked separately, then the tax authority can inform the applicant that both the transactions need to be covered in the APA. The taxpayer may also decide on whether to file for a unilateral APA for one or more international transaction while going in for a bilateral APA for others. • The APA authority cannot refuse a request for pre-filing application. • The preliminary understanding reached at the time of pre-filing does not bind the taxpayer or the tax authority since the agreement will be reached based on the detailed analysis carried out after filing of the APA application. 2 • A written communication would be provided to the taxpayer based on the understanding reached at the end of the pre-filing consultations. APA application and proceedings • The taxpayer is required to provide the multinational structure, organizational arrangement, operation set up, including major transaction flows preferably in the form of flowcharts/diagram and a detailed FAR analysis of the applicant and the relevant entities. • The critical assumptions forming part of the application may include legal, operational, tax, financial, accounting and economic conditions or assumptions, even if they are not within the applicant’s control. • The APA authorities would agree on the date of visit to the premises of the applicant after consultation with the applicant. The purpose of the visit primarily would be to understand the business model and ascertain the functional profile of the applicant. • The APA authorities are not bound by the past history for the international transaction; however details of audit history of transactions are useful as they give a better understanding to the tax authorities to analyze the information. • If a taxpayer admits a PE, the taxpayer can file an APA for determining profit attribution to a PE. • There is no fixed time line for the various steps in an APA process. However the target timeline for Global Tax Alert Transfer pricing the various steps can be discussed during pre-filing consultations. • The applicant can withdraw the application before the draft agreement is sent to the Board (for unilateral APA) or before the MAP arrangement is sent by the competent authority to the Board (for bilateral/multilateral APA). Bilateral/Multilateral APA • Requests for bilateral/multilateral APAs can be accepted by the Indian Competent Authority where a tax treaty exists between India and the other country containing an article on Mutual Agreement Procedure, the tax treaty contains provisions similar to Article 9(2) of the OECD Model Convention on Associated Enterprises, providing for correlative relief and an APA program exists in the other country. • A unilateral APA can be converted to a bilateral APA (without payment of additional fee) before the mutually agreed draft agreement is forwarded to the Board and a similar request is made with the competent authority. • Once a unilateral APA has been entered into, MAP benefit (correlative relief) will not be available to the applicant/ associated enterprise(s) with respect to the covered transaction. • In the case of a multilateral APA, if negotiations with one or all countries fail, the taxpayer has the option to opt for a unilateral APA or even a multilateral APA with other countries. • ITL mandates use of arithmetic mean where more than one price is determined by the most appropriate method for arriving at the ALP. However, an agreement can be reached in a bilateral/ multilateral APA with countries where the law mandates use of the inter quartile range. • The Taxpayer can opt for a unilateral APA or a bilateral APA at its discretion for any reasons like no APA mechanism in the other country or the Taxpayer wants only tax certainty with India or for any other reason. Amendments to the APA application • The unilateral APA application can be amended before the draft agreement is sent to the Board for approval. In the case of a bilateral/multilateral APA, an amendment can be made before the MAP agreement is sent by the competent authority to the Board. However any amendment that alters the nature of the original application will not be considered. • The conversion of a unilateral to multilateral/bilateral APA would not be taken to have effect of altering the nature of the original application. • The applicant may also be required to pay additional fees due to any amendment in the application. Filing fee • If the value of actual international transactions exceeds the projected figures, it would not have any impact on the quantum of fee paid at the time of application. In such a scenario, it cannot be concluded that the taxpayer failed to meet the critical assumptions forming the basis of the APA negotiation process. • If a transaction to be covered in an APA cannot be benchmarked separately and is a part of a number of closely linked transactions, then all the transactions need to be covered in the APA and the fee is to be determined accordingly. Regulatory provisions • Regular provisions of the ITL viz. maintenance of TP documentation/filing of Accountant’s certificate would continue to apply until the APA is concluded and a modified return is filed. Similarly, the ongoing audit proceedings will not be impacted until the APA is finalized and a modified return is filed by the taxpayer. • The Annual compliance audit post an APA would not be a broad based regular TP audit. It would be focused on ascertaining compliance with the terms of the APA. • The confidentiality provision of the ITL allows sharing of information filed during the APA application/negotiation process within the Income tax department. • The taxpayer does not have a remedy to appeal against the decision of the Board to cancel the APA application. However the taxpayer has the right to take recourse to constitutional remedies. • There are no roll back provisions in the APA rules. • There is no provision of providing additional benefit of the arm’s length range (variation up to 3 percent) to the taxpayer beyond the price agreed under the APA. • Retrospective amendments in law governing the APA can have an impact on the APA already concluded. Use of Experts • The APA rules provide for inclusion of experts in statistics, economics, law or any other field. The Director General of Incometax (International Taxation) has been given the power to nominate experts. These experts would be taken from other Government departments and their services would be case specific and need based. Comments The Advance Pricing Agreement Guidance Booklet with FAQs issued by the Board provides clarity on a number of issues that taxpayers may have had about the APA program. It is expected the APA Guidance will prove to be an effective and convenient tool to educate taxpayers in complying with the provisions of the program. Endnote 1. Refer to our Transfer Pricing Alert, India publishes rules for implementing Advance Pricing Agreements, dated 4 September 2012. Global Tax Alert Transfer pricing 3 For additional information with respect to this Alert, please contact the following: Ernst & Young Assurance | Tax | Transactions | Advisory Ernst & Young LLP (India) • Vijay Iyer, New Delhi • Rajendra Nayak, Bangalore +91 11 6623 3240 +91 80 4027 5454 [email protected] [email protected] About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. 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