GLOBAL TRANSFER PRICING SERVICES
Advance Pricing
Agreement
Considerations
for India
June 2011
kpmg.com/in
Contents
Introduction
1
What is an APA?
2
Clear Audit Alternative
4
The Advance Pricing Agreement
Process
6
Establishing an APA Program
11
Establishing Governing Principles
14
APAs within the Taxing Authority
16
Conclusion
18
Annexures
20
© 2011 KPMG,
KPMG
G, an Indian Partnership
Partnersh
hip and a member ﬁrm
m of the KPMG network of independent member ﬁrms
afﬁliated with
h KPMG Inte
ernational C
ooperattive (“KP
PMG
G International”), a Swiss entity. All rights reserved.
International
Cooperative
(“KPMG
1
Introduction
Advance Pricing Agreement (APA) considerations for India
With the rapid globalization of
the economy, tax authorities in
India have become increasingly
proactive and vigilant while
scrutinizing multinational company
transfer pricing with Indian
afﬁliates and correspondingly
increasing the intensity of
audits. The response to this has
been predictable – substantially
increased litigation as both
taxpayers and tax authorities,
unaided by any authoritative
guidance on the subject, navigate
through transfer pricing legislation
and grapple with uncertain tax
positions year after year.
Given this background, the Indian
government has introduced
a proposal to add APAs to the
Direct Taxes Code effective from
April, 2012. The proposal will
allow the Central Board for Direct
Taxes (‘CBDT’ or ‘the Board’)
of the Indian Revenue Service,
with the approval of the Central
Government, to enter into APAs
with taxpayers for up to ﬁve years,
binding both the taxing authority
and taxpayer with regard to the
transactions covered by the
agreement. A summary of key
provisions of the legislation is
attached as Annexure I.
This document discusses the key
principles that a successful APA
program in India will embody by
looking at the approaches taken by
different taxing authorities whose
APA programs vary in their stages
of development.
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afﬁliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
2
What is an APA?
An APA is an agreement that
determines in advance an appropriate
set of criteria (e.g. method, comparables
and appropriate adjustments thereto, as
well as critical assumptions as to future
events) for determining the transfer
prices for covered intercompany
transactions during a ﬁxed period of
time.
For clear expectations on all sides and
for the success of the APA program,
it is important for the Board to state
unequivocally what an APA is. The
Government has set out the broad
parameters deﬁning APAs, but not
the speciﬁcs: “The arm’s length price
of any international transaction, in
respect of which the advance pricing
agreement has been entered into…shall
be determined in accordance with the
advance pricing agreement so entered.”
(Direct Taxes Code [the ‘DTC’], Sec.
118(3)) In other words, an APA deﬁnes
the arm’s length price for a covered
transaction. It is binding on the “person
in whose case the agreement has been
entered into and on the Commissioner
and the income-tax authorities
subordinate to him. (DTC, Sec. 118(5)).
Looking at the relevant points of
reference applicable for the United
States, which has collectively more
APA experience than any other taxing
authority, the language differs. An
APA is deﬁned as “a binding contract
between the IRS and a taxpayer by
which the IRS agrees not to seek a
transfer pricing adjustment under IRC,
Sec. 482 for a covered transaction
if the taxpayer ﬁles its tax return for
a covered year consistent with the
agreed transfer pricing method (‘TPM’).”
(Announcement and Report Concerning
Advance Pricing Agreements, March
29, 2011, page 1). An APA binds the
Internal Revenue Service [the ‘IRS’] and
taxpayer to the terms of the agreement.
In contrast to the US rules, in Mexico an
APA, whether unilateral or bilateral, is a
ruling issued by the taxing authority to a
speciﬁc taxpayer. It is not a contractual
arrangement.
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3
There is one item on which all
authorities seem to agree: the APA
process is not an advance audit, and that
should be stated clearly to both internal
and external stakeholders. Further, as an
APA seeks to address the appropriate
arm’s length result for prospective
years, the tax authority review should
be focused on agreement to general
principles, and in-depth data reviews
for prior years, to the extent they are
necessary, should be circumscribed.
In India, the Board will limit the term of
an APA to ﬁve years (DTC, Sec. 118(4)),
as in China (3-5 years; ( Implementation
Measures of Special Tax Adjustments
(Trial Version)[ the ‘IMSTA’], Chapter
6, Article 49), rather than establish
an expected minimum term, as in
the United States (5 years; Revenue
Procedure 2006-9 [the ‘RP’], Sec. 4.07).
Flexibility in the number of years may
be a particularly important feature at the
launch of an APA program, as APAs with
long terms are sometimes necessary
to accommodate a business cycle for a
particular taxpayer, or for other reasons.
The APA process is not
an audit, and that should
be stated clearly to both
internal and external
stakeholders.
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afﬁliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4
Clear Audit Alternative
Taxpayers must perceive that the
APA Program beneﬁts them. Quite
simply, if it does not, they will not
participate and the program will
fail. Obviously, by introduction
of such a program, the Indian
government wants the program
to succeed. A key factor affecting
participation in the program,
and therefore its success, is
A key factor affecting participation in the program,
and therefore its success, is that an APA should
offer a viable alternative to the adversarial system
that will produce a fair outcome.
that an APA should offer a viable
alternative to the adversarial
system that will produce a fair
outcome. This is particularly true
considering that an APA process
is initiated by the taxpayer, and
therefore the primary burden
associated with participation
in the program is placed on it.
Clearly distinguishing the new
APA alternative from the existing
compliance and enforcement
regime will make this point. In
other words, the APA Program
conducted by the National
Ofﬁce must not be construed as
synonymous to the normal audit
proceedings undertaken by the
revenue authorities at the local
level.
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afﬁliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
5
The approach suggested here is
consistent with that taken by many
other jurisdictions. For example, in the
United States, the APA Program is an
alternative to the traditional examination
process: “APAs are intended to
supplement traditional administrative,
judicial, and treaty mechanisms for
resolving transfer pricing disputes.”
(RP, Sec. 2.04(1)) The US engages
with taxpayers in a “principled and
cooperative manner on a prospective
basis.” (RP, Sec. 2.01).
An alternative to the adversarial process
requires ﬂexibility in the program. In
contrast to an audit, the Board can
have greater latitude to rely on taxpayer
representations when negotiating with
taxpayers. The government can then
verify those representations when
reviewing compliance with the APA.
In the event taxpayer misrepresented
or omitted information the Board can
revoke the APA ab initio and subject the
taxpayer to audit.
China makes clear that an APA
supersedes local authority: “All state
and local tax bureaus shall accept and
implement an APA that is concluded
between the tax authorities and
the taxpayer, provided that the
taxpayer abides by all the terms and
requirements of the APA.” (IMSTA,
Chapter 6, Article 59.)
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afﬁliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
6
The Advance
Pricing Agreement Process
A. Preﬁling conferences
Preﬁling conferences are used in many
jurisdictions to allow taxpayers to
discuss the suitability of an APA before
deciding to pursue it. In most places,
as in the US, they are voluntary. In the
US, the IRS encourages taxpayers
to request a preﬁling conference so
that the IRS can provide information:
“a preﬁling conference [can be
used] to clarify what information,
documentation, and analyses are
likely to be necessary for the Service
to consider an APA request.” (RP, Sec.
3.02) In China, preﬁling conferences are
mandatory.
Preﬁling conferences can be held on a
named or anonymous basis.
Particularly in the beginning of the
program, it would be useful if taxpayers
are given an opportunity to meet the
Board personnel, who will process
their case. This will help build trust
in the process. In particular, offering
anonymous preﬁling conferences
provides taxpayers the opportunity
to determine the receptivity of the
Board to the issues in its particular
case without fear of inviting an audit
or identifying possible areas of audit,
should the taxpayer decide not to
proceed with an APA.
Particularly in the beginning of the program,
giving taxpayers an opportunity to meet the
Board personnel who will process their case
will help build trust in the process.
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7
The preﬁling conference can cover a
variety of topics. A document should
precede the preﬁling conference so
that all are prepared for a productive
meeting. China lists these topics that
it would cover in a preﬁling conference
and they serve as a good outline of
areas to cover. (China Annual Report
[the ‘CAR’], p. 8)
• Years to be covered under the
arrangement
• Related parties involved and covered
transactions
• Overview of business operations in
prior and future years
• Functional and risk proﬁles of the
applicant
• Rollbacks
• Any other issues requiring
explanation
• And for bilaterals
• Preﬁling conferences with other tax
authorities
• Any transfer pricing method or
calculation method proposed to
other taxing authorities.
Notably, preﬁling conferences can also
serve as a screening mechanism to
eliminate cases that fall outside the
parameters of the stated policy for the
APA Program.
B. Jurisdiction and the ﬁrst
APA year prospectivity
The Board may need to decide which
arm within the Indian Revenue
Service will have control or jurisdiction
over an APA year, and at what point
that jurisdiction will shift (if it does.)
Precedents within the Indian Revenue
Service may include the point at which
a case moves into the jurisdiction of the
competent authority for resolution.
In the United States, “a taxpayer
must ﬁle its APA request within the
time prescribed by statute (including
extensions) for ﬁling its Federal income
tax return for the ﬁrst proposed APA
Year.” (RP, Sec. 4.07(2)) The US rules,
while easily administrable, make
prospectivity somewhat difﬁcult,
especially given the current backlog in
the APA Program. Corporate tax returns
for calendar year taxpayers are due
March 15 of the year following year end.
Taxpayers can ﬁle an extension for six
months, so in effect the return is due
September 15 of the following year.
Therefore, the IRS must receive an APA
request for a calendar year taxpayer
seeking to cover 2010 by September 15,
2011.
Recent statistics released by the IRS
indicate that it takes on an average
three years to close a bilateral Advance
Pricing Agreement.1 This delay in
case processing, together with the
inherent problems associated with the
jurisdictional calculations referenced
above result in the loss of a fair amount
of prospectivity in the United States
Rules requiring taxpayers to ﬁle APA
requests earlier than nine months after
the close of the ﬁrst proposed APA year
could improve prospectivity. In Japan,
for example, taxpayers have to ﬁle APA
renewal requests before the start of
the ﬁrst year of the APA renewal period.
(Commissioner’s Directive on the
Operation of Transfer Pricing, National
Tax Agency of Japan, Section 5-22.)
Preﬁling conferences, both anonymous
and named, are so much a part of
worldwide APA administration that the
absence of such conferences could be
perceived as an unwillingness to engage
in open communication with taxpayers.
1. Internal Revenue Service Doc. 2010-27415; 2010
TNT 248-41, IRS Releases 2010 Competent
Authority Statistics, December 27, 2010.
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8
C. APA Application: What will
be required?
In general, an APA application should
contain enough information to properly
evaluate the arm’s length nature of the
proposed transactions. Governments
vary in their speciﬁc requests, which
accommodate their speciﬁc reporting
requirements. The Chinese rules give a
good summary of the items necessary
to make a complete evaluation: (IMSTA,
Chapter 6, Article 51)
• Identifying information of the related
parties subject to the APA
• History of business operations,
worldwide organizational structure,
ownership, capitalization, ﬁnancial
arrangements, principal businesses,
locations of the business and major
transaction ﬂows
• A description of the covered
transactions, their value and
how they relate to any company
transactions not covered under the
APA
• For each covered party a detailed
analysis of the functions and
economic activities performed, the
assets employed, the economic
costs incurred, the risks assumed,
relevant contractual terms, relevant
economic conditions
• Copies of intercompany agreements
• Financial and tax data for at least
three years
• Transfer pricing compliance
documentation
• Any legal authority or tax treaty issue
relating to the proposed transfer
pricing method
• A discussion of previous and current
issues that the taxing authority has
raised at any point in the examination
process relating to the covered
transactions
• A complete discussion regarding
how the taxpayer chose its proposed
method as well as the research
required to support its proposed
method. For example, if the
taxpayer puts forward comparable
companies, the criteria applied in
order to arrive at those companies
as well as their complete ﬁnancial
information should be provided.
If India were to require other tax forms
that touch on related party transactions,
these forms could be included also.
For example, the United States
requires taxpayers with related party
transactions with foreign entities to ﬁle
a Form 5471 (US parent company) or
5472 (US subsidiary of foreign parent)
as part of the APA submission (RP, Sec.
4.03).
D. Should an APA Program
require user fees?
The success of an APA Program will also
depend on the fees, if any, which may be
required to be paid by the taxpayer. The
Board, while framing the Guidelines,
would have to consider: whether or not
to have a user fee at all. If yes, should
it be a ﬂat fee or a variable fee linked
to an estimate of cost or some other
measure? Tax administrations answer
this question in a variety of different
ways depending to a large extent where
their funding source comes from. In
the United States, the expenses of the
APA Program are covered within the
budget of the Internal Revenue Service
that receives an annual budget from
Congress. Taxpayers must however,
pay a user fee to avail themselves of
the services of the Advance Pricing
Agreement Program. The user fee in the
US, with some exceptions, is
USD 50,000 (RP, Sec. 4.12). In contrast,
China does not require a user fee to ﬁle
an APA request (CAR, Sec III.1.c.(b)). In
Canada, on the other hand, a ﬁling fee
is imposed and is based on an estimate
of travel costs for the government to do
site visits and otherwise to administer
the program (Circular 94-4R, Section
27).
If the Board is considering a ﬁling fee, it
needs to reﬂect on the fact that a high
user fee may eliminate certain taxpayers
from seeking an APA; i.e., those whose
revenues, risk, or exposure may not
justify paying a fee. In this sense,
a user fee functions as a screen to
keep taxpayers out of the program. Is
such a result desired? The Board will
also need to consider whether such
constraints would need to be continued
once the program is operational and
more taxpayers avail themselves of the
program.
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9
E. Case processing
The Board will need to determine
who will process APAs, evaluate the
taxpayer’s position and negotiate on
behalf of the Board. The Board may
choose to disclose this information
to the public or not. China and the
United States both provide guidance
regarding the way taxpayers can
expect cases to be handled. Published
guidance sets expectations for both
the employees processing the case
within the taxing authority as well as
for taxpayers accessing the system.
However, publishing detailed guidance
prematurely may make it difﬁcult for the
Board to meet its own expectations.
China’s guidance sets out the
parameters of the process without
specifying exactly who will do what.
This general approach offers a good
model for a nascent program such as
India’s and contrasts with the speciﬁc
rules governing more mature programs
like those in the US or Canada.
In China, due diligence follows receipt
of the APA request,: “Upon receipt of
the formal APA application package
and other required documents, the tax
authority will evaluate the documents
and form a position within ﬁve
months…” (CAR, p. 10.)
The due diligence phase is followed by
negotiation of the APA: “For unilateral
APAs, the tax authority will arrange
negotiations and discussions with
the enterprise after the tax authority
reaches a position following its
examination and evaluation process….
For bilateral or multilateral APAs,
the SAT will arrange negotiations
and discussions with the relevant
competent authorities based on the
SAT’s position following its examination
and evaluation of the relevant
information provided.” (CAR, p.11.)
G. Terminating an APA
Under some (usually rare)
circumstances it may be necessary
to terminate an agreement. Many
governments spell out some of those
circumstances. In the case of fraud or
failure to disclose material information,
the Board could take the position that
the APA was void ab initio and therefore
a taxpayer would be subject to audit for
the years in question (DTC, Sec. 118(7)).
F. Compliance requirements
The Board needs to frame guidelines
to establish procedures to administer
the APA and to verify a taxpayer’s
compliance with its terms. Most
governments use a report, ﬁled annually
and evidencing compliance in each
year of the APA to assure compliance.
The Board should determine who
will primarily be responsible for this
compliance veriﬁcation. It may be
useful to offer this role to the ﬁeld ofﬁce
that would have had jurisdiction in
auditing the taxpayer.
The Board should determine who will primarily
be responsible for this compliance veriﬁcation.
It may be useful to offer this role to the ﬁeld
ofﬁce that would have had jurisdiction in
auditing the taxpayer.
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10
H. Rollbacks
I. Renewals
The Board will need to consider whether
providing a rollback mechanism at the
start of the Indian APA Program is in the
best interest of the Government and
taxpayers. While a rollback mechanism
can resolve pre-APA years and therefore
improve efﬁciency of the process,
the rules and objectives related to
conducting tax audits would need to be
reconciled with the rules and objectives
of an APA program, which essentially
are to be ﬂexible in setting standards for
prospective evaluation of a taxpayer’s
transfer pricing treatment of covered
transactions.
Many countries recognize that taxpayers
may wish to roll forward, or renew,
existing APAs particularly when the
facts and circumstances surrounding
the covered transactions have not
changed materially. In such case, it
may be possible to use streamlined
procedures to expedite processing.
China has such procedures, “If the APA
needs to be renewed, the enterprise
should submit the renewal application
90 days before the end of the APA
implementation period…” (IMSTA,
Chapter 6, Article 57).
In the United States, the APA Program
rules state that “the Service’s policy
is to use rollbacks whenever feasible,
based on the consistency of the facts,
law, and available records for the prior
years.” (RP, Sec. 2.12)
Rollbacks, when permitted, are
voluntary in the United States. In
Canada, rollbacks are considered at
the behest of the taxpayer, or the tax
service ofﬁcer may decide to apply
the APA to the non statue barred prior
taxation years only in a scenario, if
the terms and conditions of the prior
years are similar to the year for which
the APA has been concluded (Circular
94-4R, Section13). The Chinese APA
regulations also provide for rollback.
However, the same is applicable only in
a case of speciﬁc application made by
the taxpayer and the same is approved
by tax authorities. (IMSTA, Chapter 6,
Article 49)
The United States promises expedited
treatment for renewals (RP, Sec. 12) but
in practice currently requires a similar
level of review notwithstanding similar
facts. Renewals beneﬁt from a reduced
user fee, USD 35,000 (rather than
USD 50,000) for a renewal request
when “its subject matter is substantially
the same as in a previous APA request
by the taxpayer.” (RP, Sec. 4.12(4)).
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11
Establishing an APA Program
A. APA Program policy
statement
A new initiative like an APA Program
impacts a variety of stakeholders
within the government, in the business
community and with treaty partners
around the world. A policy statement in
this regard will provide clarity as to the
purpose of such APA Program from the
perspective of the Indian government.
A policy statement gives the Board a
touchstone to return to over and again
in public statements and in discussions
with all stakeholders.
In the United States, the IRS’s policy
pronouncements echo those issued
by many taxing authorities: the
APA Program provides a “voluntary
process…to resolve transfer pricing
issues…in a principled and cooperative
manner on a prospective basis. The
APA Process increases the efﬁciency
of tax administration…” (RP, Sec. 2.01)
The parties “work towards a mutual
agreement in a spirit of openness and
cooperation. The prospective nature of
APAs lessens the burden of compliance
by giving taxpayers greater certainty
regarding their transfer pricing methods,
and promotes the principled resolution
of these issues…” (RP, Sec. 2.01).
The process of developing a policy
statement can engage the cooperation
of the diverse internal stakeholders
within the India Revenue Service: the
national ofﬁce, audit ofﬁcers, lawyers,
executives and policy makers who
can discuss the program and what
the Board hopes to achieve with it.
Once developed, a policy statement
will serve as an organizing principle in
training employees or re-training those
accustomed to tasks with different
priorities.
For example, the Chinese government’s
APA policy lets employees know how
to treat taxpayers and tells taxpayers
the government’s expectations
regarding their participation in the
process. In China, the APA process
“provides an effective way to enhance
understanding, strengthen collaboration
and mitigate disputes.” (CAR, p.3)
A policy statement can bring
stakeholders back to a common ground
if things go awry. And, the absence
of a policy statement can create
confusion and a vacuum with regard to
expectations of the Program and who
will be expected to meet them.
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12
B. Target audience
Policy decisions will impact the type
of taxpayers interested in pursuing an
APA so it is important to identify the
desired audience for APAs. To have
successful outcomes from the Program,
the Board needs to select initial cases
for consideration carefully and choose
bilateral in certain cases (discussed
fully below). An onslaught of cases
combined with a paucity of personnel
to handle them will not translate to
success. To help deﬁne the target
audience, the Board can ask if they wish
to:
•
Interest as many taxpayers as
possible?
•
Get the most burdensome cases
out of the adversarial system?
•
Work with only the largest
taxpayers?
•
Start with relatively simple
cases and develop expertise
before addressing more complex
cases, (like intangible shifting for
example)?
The Board then can devise the program
to best appeal to the target audience.
The Board can further examine what
components of an APA Program such
an audience would ﬁnd most appealing.
Faster resolution of transfer pricing
matters? More certainty? Resolution
of issues for a longer period of time?
Interacting at the taxing authority with a
more professional staff or a staff more
experienced in transfer pricing matters?
Different taxing jurisdictions have
taken different views on this subject.
For example, China gives priority to
companies that have been subject to
transfer pricing audits. The UK prefers
to use APAs for complex, rather than
straightforward cases, where complex
means there “is doubt as to how
the arm’s length standard should be
applied;” (Statement of Practice 14.a.)
those cases likely to result in double
taxation or those in which taxpayer
seeks to use a “highly tailored” transfer
pricing method.
China sets forth guidelines requiring
candidates for APAs to meet all of the
following criteria: companies with
related party transactions exceeding
RMB 40 million (approximately
USD 6 million); companies meeting
reporting requirements for relatedparty transactions, and those fulﬁlling
contemporaneous documentation
requirements (IMSTA, Chapter 6, Article
48). The Board can consider such
criteria either as guidelines for potential
applicants or as a requirement.
After developing more institutional
experience, the Board can train
additional personnel and add resources
as needed in order to increase the
program’s capacity.
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13
A bilateral APA program easily ﬁts within the
provisions the Mutual Agreement Procedure (MAP)
article of most treaties…. Bilateral APAs are clearly
preferred by most governments where an effective
double tax treaty exists.
C. The importance of bilateral
APAs
Eliminating double taxation with
certainty requires a bilateral rather than
a unilateral APA. For this reason the
availability of bilateral APAs makes the
program more appealing to taxpayers
seeking certainty on both sides of their
transactions. Using bilaterals, the Board
can more efﬁciently deploy its resources
to fully resolve transfer pricing disputes
and the double taxation they often
cause.
A bilateral APA program easily ﬁts within
the provisions the Mutual Agreement
Procedure (MAP) article of most
treaties and within the MAP article
(27) of the US-India Treaty speciﬁcally.
Coming into force in 1989 before the
beginning of the APA Program in the
United States, the Treaty does not name
APAs in Article 27 as some of the more
recent treaties do. However, it does
envision close cooperation between
the countries to alleviate double
taxation: “The competent authorities,
through consultations, shall develop
appropriate bilateral procedures,
conditions, methods and techniques
for the implementation of the mutual
agreement procedure provided for in
this article.” (Article 27(2))2
Bilateral APAs are clearly preferred
by most governments where an
effective double tax treaty exists.
Indeed, Germany requires bilateral
APAs. In Germany, APAs by deﬁnition
are bilateral. Provisions do exist for
unilateral APAs only when the bilateral
treaty network is not available. In
such cases, the regional tax authority
may issue a unilateral decision with
future effect, with the approval of the
Federal Central Tax Ofﬁce. However,
the German government is clear that
such unilateral rulings are not favored:
“The fact that unilateral measures do
not reliably eliminate double taxation
or might even create taxation gaps
advocates rejecting such requests.”
(APA Procedures, Section 1.2).
France takes a similar view: bilateral
APAs are the rule and unilaterals are the
exception only in special cases: where
there is no treaty, where a large number
of countries are involved, thus making
a multilateral APA impractical, or where
small businesses are involved.3
The MAP process offers opportunities
to collaborate with treaty partners and
gain their support for India’s initiative.
A unilateral-only program does the
opposite—it pressures taxpayers to
make a choice between pursuing a
collaborative path with India or with
another country, as companies are
unlikely to pursue separate unilaterals in
two jurisdictions given the expense as
well as the lack of certainty remaining at
the end of such a long process.
communication and collaboration
among the competent tax authorities
of different jurisdictions; and (b) help
enterprises avoid transfer pricing
audits as well as double taxation risks
in two (for bilateral APA) or more (for
multilateral APA) tax jurisdictions.” (CAR,
p.3)
The United States also has a clear
preference for bilateral (or multilateral)
APAs: “Where possible, in the interest
of sound tax administration and to
ensure that no potential for double
taxation results from an APA, an APA
should be concluded on a bilateral
or multilateral basis between the
competent authorities through the
mutual agreement procedure of the
relevant income tax treaty or treaties.”
(RP, Sec. 2.09)
Canada concurs: “The purpose of
pursuing a BAPA or MAPA is to avoid
double taxation between (the taxpayer)
and a non-resident entity, which may
happen when only a unilateral APA is in
place.” (Cir 94-4R, Par. 69).
Indeed, China highlights these points
in its Annual Report. Advance Pricing
Agreements: bilaterals “(a) facilitate
2. In particular, the language of the treaty between
India and the United States should be sufﬁcient
to include a bilateral APA component to India’s
APA Program. The government’s position for
Competent Authority discussions can be developed
by the Board and then negotiated with the treaty
partner under the provisions of the treaty. We have
not examined the provision of every tax treaty to
which India is a party, but we would anticipate the
language of other treaties should be similar.
3. Instruction 4 A-11-05, No.110 (6/24/2005) Instruction
relative à la garantie prévue à l’article L.80 B 7e du
Livre des Procédures Fiscales et à la Procédure
d’accord préalable unilatéral en matière de prix de
transfert
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Establishing governing
principles
A. Program goals
B. APA Program rules
Setting goals helps the Board measure
its success internally and against
stakeholder expectations. If to make
these goals public is a separate
question; answering no however does
not obviate the need for goals.
The Board should publish rules
explaining the APA process, how
the Board will administer it and how
taxpayers will engage it. Countries
vary in the level of detail they publish;
advantages and disadvantages accrue
to highly detailed or more general rules.
General rules give taxpayers more
leeway and they can easily be reﬁned
later on once the Program understands
its needs. On the other hand, the Board
could issue more detailed guidance
including for example template letters
to taxpayers and a model APA, all culled
from other taxing authorities’ published
guidance. The clearer the Board’s vision
the more easily it can establish Program
rules. The model ﬁnal implementing
agreement between the IRS and
taxpayers is attached as Annexure II4.
The goals can relate to the number
of inquires, the number of actual APA
requests, the number of ﬁnished APA
cases, the number of cases diverted
from the adversarial path, staff trained.
Short term and long term goals can be
established and should be revisited
frequently, perhaps at six-month
intervals at the beginning of the
program.
4. http://www.irs.gov/businesses/corporations/
article/0,,id=96277,00.html
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C. Transparency
Transparency in the program, by periodic
reporting and public statements,
builds public awareness and support.
Including taxpayer input into the
development of procedures will assist
in this endeavor. Data collection gives
the government the tools necessary to
see where improvements are needed
or the program is not meeting its own
or the public’s expectations. Public
reporting also gives the taxing authority
an opportunity to present its own views
to the public in order to set the public’s
expectations.
We note rising expectations of
transparency as more governments
release information to the public on
an annual basis. The United States
started the trend toward transparency
over ten years ago by issuing a report
describing the experience, structure and
activities of the APA Program for the
years 1991-1999. The IRS has issued
an annual report every year since then;
the most current is the Announcement
and Report Concerning Advance Pricing
Agreements, issued March 29, 2011. The
report also includes statistics reﬂecting
how quickly the IRS processes APA
cases. Korea, Japan, Canada, Australia
and China also release information to
the public regarding the functions and
activities of their APA programs. Other
countries can be expected to follow suit.
An APA Program that protects a
taxpayer’s identity as well as its
conﬁdential information encourages
participation by the business
community. The United States
guarantees complete conﬁdentiality
for taxpayers by deﬁning the APA
and information related to it as “tax
return information,” which is subject
to strict protection under Section
6103 of the Internal Revenue Code
and other provisions. Canada also has
conﬁdentiality requirements (Par. 75), as
does China (IMSTA, Chapter 6, Article
60).
In the absence of existing measures to
protect taxpayers’ conﬁdentiality, adding
such procedures may improve taxpayer
conﬁdence.
D. Disclosure
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APAs within the Taxing
Authority
A. Where will the APA
Program reside?
The ubiety of the program may reﬂect
on its identity. In the United States,
the APA Program is located in the
Ofﬁce of Associate Chief Counsel
(International)—the ofﬁce that serves
as legal counsel to the Commissioner
of the Internal Revenue Service. It is
staffed by lawyers and economists.
The APA Program and the Competent
Authority functions have worked
successfully over the years as a team
in dealing with requests for bilateral
or multilateral APAs. In a recent
development designed to deal with
a large backlog of cases, bilateral
APA cases may also be assigned
to personnel within the Competent
Authority function.
In Canada, the APA Program is located
in its Competent Authority ofﬁce and
staffed by accountants (primarily) and
economists.
Whatever its location, the head of the
program should have the authority to
make decisions furthering the stated
goals of the program as well as the
support of executives in the organization
required to execute them. The authority
to do things differently than the agency
is accustomed to is tempered by
provisions requiring revocation in the
event of material misrepresentations.
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B. Requisite skills and
training
Negotiating an APA differs from
auditing a taxpayer. A successful
APA program requires a technically
knowledgeable staff that can negotiate
a case to resolution, taking into account
the disparate interests of various
stakeholders. A team combining
accountants, attorneys and economists
and designating a leader from among
them can provide the necessary skills.
Economists can develop a sound model
for arm’s length pricing, accountants
analyze taxpayer’s books and records
to provide an understanding of the
business and the extent to which the
model ﬁts the taxpayer’s operations.
Attorneys offer negotiating skills and
the context to understand where a
particular set of facts ﬁts in with the
Board’s legal position on other transfer
pricing cases.
To the extent the personnel stafﬁng the
APA program need to learn new skills,
where will the training come from?
For example, accountants in the ﬁeld
work on APA teams all over the world
applying their skills to a different end—
negotiating an APA rather than auditing
a business. Can such a model work in
India?
Does anyone with the desired expertise
already work in the Board or within
other government agencies? If not,
how will the program be staffed? Who
will be invested in the success of the
Program and how will their performance
be measured? Will the Board use
the assistance of economists in the
Program? If so, where will they come
from?
To the extent that such a collaborative
approach is new to the agency, how will
it secure the training necessary to be
successful?
C. Interacting with the ﬁeld
It is important to set forth the role and
expectations of the ﬁeld particularly
in the beginning of the Program. The
Board should clearly distinguish the
APA Program from the audit function.
The APA Program can consult with
the audit function, which may have
expertise regarding a particular taxpayer,
but the APA Program should lead the
negotiations. Placing the APA Program
in the driver’s seat will go a long way in
sending the message that an APA is not
a prospective audit.
A technical point regarding the
interaction between the audit and APA
functions: The Board should specify
what, if any, information gathered
during the APA process the audit
function can use in the event the APA
fails. In the US, the IRS differentiates
between factual and non-factual oral
and written representations made
in conjunction with the APA request
and development. The ﬁeld may use
any factual information it collects as
part of the APA process in an audit or
during any administrative proceeding.
However, the ﬁeld may not use nonfactual representations. (RP, Sec. 10.04)
A factual representation could be the
taxpayer’s ﬁnancial data, while a nonfactual representation is the economic
analysis that develops the transfer
pricing method using that data. In the
absence of such a provision, the transfer
pricing method proposed by taxpayer or
the analyses accompanying it could be
used by the ﬁeld team in an audit of the
taxpayer in the event the APA failed.
The Indian Tax Tribunal is a unique
authority that taxpayers in India
must take into account. Deciding
questions of fact, the Tax Tribunal plays
an important role in transfer pricing
cases whose outcome often relies on
questions of fact. How will the Board
weigh Tax Tribunal decisions when
considering APA applications? The
Board should address this question as
it develops rules for implementing the
program.
Placing the APA Program in the driver’s
seat will go a long way to sending the
message that an APA is neither an audit
nor a rubber stamp for audit results.
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18
Conclusion
India would do well to develop an Advance
Pricing Agreement program to assist with
addressing complex transfer pricing issues
in a more cooperative, less adversarial and
more efﬁcient way. Countries around the
world use APAs to improve compliance
and to best deploy their transfer pricing
resources. Taxpayers appreciate the
certainty they provide.
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20
Annexures
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Annexure I
Annexure I
Direct Taxes Code – Provisions relating to APA
Section
Text of the Section
118
(1) The Board, with the approval of the Central Government, may enter into an
advance pricing agreement with any person, specifying the manner in which
arm’s length price is to be determined in relation to an international transaction,
to be entered into by that person.
(2) The manner of determination of arm’s length price referred to in sub-section (1)
may be any method including one of the prescribed methods, as referred to in
sub-section (1) of section 117, with such adjustments or variations, as may be
necessary or expedient so to do.
(3) The arm’s length price of any international transaction, in respect of which the
advance pricing agreement has been entered into, notwithstanding anything
in this Chapter, shall be determined in accordance with the advance pricing
agreement so entered.
(4) The agreement referred to in sub-section (1) shall be valid for such ﬁnancial years
as speciﬁed in the agreement which in no case shall exceed ﬁve consecutive
ﬁnancial years.
(5) The advance pricing agreement entered into shall be binding—
(a) only on the person in whose case the agreement has been entered into;
(b) only in respect of the transaction in relation to which the agreement has
been entered into; and
(c) on the Commissioner, and the income-tax authorities subordinate to him,
only in respect of the said person and the said transaction.
(6) The agreement referred to in sub-section (1) shall not be binding, if there is any
amendment to the Code having bearing on the agreement so entered.
(7) The Board may, by order, declare an agreement to be void ab initio, if it ﬁnds that
the agreement has been obtained by the person by fraud or misrepresentation
of facts.
(8) Upon declaring the agreement void ab initio, the provisions of this Code shall,
after excluding the period beginning with the date of such agreement and
ending with the date of order under sub-section (7), apply to the person as if
such agreement had never been entered into.
(9) For the purposes of this section, the Board may, by notiﬁcation, frame a Scheme
for advance pricing agreement in respect of an international transaction.
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Annexure II
Model APA – Based on Revenue Procedure 2006-9
ADVANCE PRICING AGREEMENT
between
[Taxpayer’s Name]
and
THE INTERNAL REVENUE SERVICE
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ADVANCE PRICING AGREEMENT
between
[Taxpayer’s Name]
and
THE INTERNAL REVENUE SERVICE
PARTIES
The Parties to this Advance Pricing Agreement (APA) are the Internal Revenue Service (IRS) and [Taxpayer’s Name], EIN
________.
RECITALS
[Taxpayer Name] is the common parent of an afﬁliated group ﬁling consolidated US tax returns (collectively referred to as
“Taxpayer”), and is entering into this APA on behalf of itself and other members of its consolidated group.
Taxpayer’s principal place of business is [City, State]. [Insert general description of taxpayer and other relevant parties].
This APA contains the Parties’ agreement on the best method for determining arm’s ¬length prices of the Covered
Transactions under I.R.C. section 482, any applicable tax treaties, and the Treasury Regulations.
{If renewal, add} [Taxpayer and IRS previously entered into an APA covering taxable years ending _____ to ______,
executed on ________.]
AGREEMENT
The Parties agree as follows:
1 Covered Transactions. This APA applies to the Covered Transactions, as deﬁned in Appendix A.
2 Transfer Pricing Method. Appendix A sets forth the Transfer Pricing Method (TPM) for the Covered Transactions.
3 Term. This APA applies to Taxpayer’s taxable years ending __________ through ________ (APA Term).
4 Operation.
a. Revenue Procedure 2006-9 governs the interpretation, legal effect, and administration of this APA.
b. Nonfactual oral and written representations, within the meaning of sections 10.04 and 10.05 of Revenue
Procedure 2006-9 (including any proposals to use particular TPMs), made in conjunction with the APA Request
constitute statements made in compromise negotiations within the meaning of Rule 408 of the Federal Rules of
Evidence.
5. Compliance.
a. Taxpayer must report its taxable income in an amount that is consistent with Appendix A and all other
requirements of this APA on its timely ﬁled US Return. However, if Taxpayer’s timely ﬁled US Return for an APA
Year is ﬁled prior to, or no later than 60 days after, the effective date of this APA, then Taxpayer must report its
taxable income for that APA Year in an amount that is consistent with Appendix A and all other requirements of this
APA either on the original US Return or on an amended US Return ﬁled no later than 120 days after the effective
date of this APA, or through such other means as may be speciﬁed herein.
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b. {Insert when US Group or Foreign Group contains more than one member.} [This APA addresses the arm’s-length
nature of prices charged or received in the aggregate between Taxpayer and Foreign Participants with respect to
the Covered Transactions. Except as explicitly provided, this APA does not address and does not bind the IRS with
respect to prices charged or received, or the relative amounts of income or loss realized, by particular legal entities
that are members of US Group or that are members of Foreign Group.]
c. For each taxable year covered by this APA (APA Year), if Taxpayer complies with the terms and conditions of this
APA, then the IRS will not make or propose any allocation or adjustment under I.R.C. section 482 to the amounts
charged in the aggregate between Taxpayer and Foreign Participant[s] with respect to the Covered Transactions.
d. If Taxpayer does not comply with the terms and conditions of this APA, then the IRS may:
i. enforce the terms and conditions of this APA and make or propose allocations or adjustments under I.R.C. section
482 consistent with this APA;
ii. cancel or revoke this APA under section 11.06 of Revenue Procedure 2006-9; or
iii. revise this APA, if the Parties agree.
e. Taxpayer must timely ﬁle an Annual Report (an original and four copies) for each APA Year in accordance with
Appendix C and section 11.01 of Revenue Procedure 2006-9. Taxpayer must ﬁle the Annual Report for all APA
Years through the APA Year ending [insert year] by [insert date]. Taxpayer must ﬁle the Annual Report for each
subsequent APA Year by [insert month and day] immediately following the close of that APA Year. (If any date falls
on a weekend or holiday, the Annual Report shall be due on the next date that is not a weekend or holiday.) The IRS
may request additional information reasonably necessary to clarify or complete the Annual Report. Taxpayer will
provide such requested information within 30 days. Additional time may be allowed for good cause.
f. The IRS will determine whether Taxpayer has complied with this APA based on Taxpayer’s US Returns, Financial
Statements, and other APA Records, for the APA Term and any other year necessary to verify compliance. For
Taxpayer to comply with this APA, an independent certiﬁed public accountant must {use the following or an
alternative} render an opinion that Taxpayer’s Financial Statements present fairly, in all material respects, Taxpayer’s
ﬁnancial position under US GAAP.
g. In accordance with section 11.04 of Revenue Procedure 2006-9, Taxpayer will (1) maintain its APA Records, and
(2) make them available to the IRS in connection with an examination under section 11.03. Compliance with this
subparagraph constitutes compliance with the record-maintenance provisions of I.R.C. sections 6038A and 6038C
for the Covered Transactions for any taxable year during the APA Term.
h. The True Taxable Income within the meaning of Treasury Regulations sections 1.482-1(a)(1) and (i)(9) of a member
of an afﬁliated group ﬁling a US consolidated return will be determined under the I.R.C. section 1502 Treasury
Regulations.
i. {Optional for US Parent Signatories} To the extent that Taxpayer’s compliance with this APA depends on certain acts
of Foreign Group members, Taxpayer will ensure that each Foreign Group member will perform such acts.
6. Critical Assumptions. This APA’s critical assumptions, within the meaning of Revenue Procedure 2006-9, section 4.05,
appear in Appendix B. If any critical assumption has not been met, then Revenue Procedure 2006-9, section 11.06,
governs.
7. Disclosure. This APA, and any background information related to this APA or the APA Request, are: (1) considered
“return information” under I.R.C. section 6103(b)(2)(C); and (2) not subject to public inspection as a “written
determination” under I.R.C. section 6110(b)(1). Section 521(b) of Pub. L. 106-170 provides that the Secretary of
the Treasury must prepare a report for public disclosure that includes certain speciﬁcally designated information
concerning all APAs, including this APA, in a form that does not reveal taxpayers’ identities, trade secrets, and
proprietary or conﬁdential business or ﬁnancial information.
8. Disputes. If a dispute arises concerning the interpretation of this APA, the Parties will seek a resolution by the IRS
Associate Chief Counsel (International) to the extent reasonably practicable, before seeking alternative remedies.
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9. Materiality. In this APA the terms “material” and “materially” will be interpreted consistently with the deﬁnition of
“material facts” in Revenue Procedure 2006-9, section 11.06(4).
10. Section Captions. This APA’s section captions, which appear in italics, are for convenience and reference only. The
captions do not affect in any way the interpretation or application of this APA.
11. Terms and Deﬁnitions. Unless otherwise speciﬁed, terms in the plural include the singular and vice versa. Appendix D
contains deﬁnitions for capitalized terms not elsewhere deﬁned in this APA.
12. Entire Agreement and Severability. This APA is the complete statement of the Parties’ agreement. The Parties will
sever, delete, or reform any invalid or unenforceable provision in this APA to approximate the Parties’ intent as nearly
as possible.
13. Successor in Interest. This APA binds, and inures to the beneﬁt of, any successor in interest to Taxpayer.
14. Notice. Any notices required by this APA or Revenue Procedure 2006-9 must be in writing. Taxpayer will send notices
to the IRS at the address and in the manner set forth in Revenue Procedure 2006-9, section 4.11. The IRS will send
notices to:
Taxpayer Corporation
Attn: Jane Doe, Sr. Vice President (Taxes)
1000 Any Road
Any City, USA 10000
(phone: _________)
15. Effective Date and Counterparts. This APA is effective starting on the date, or later date of the dates, upon which all
Parties execute this APA. The Parties may execute this APA in counterparts, with each counterpart constituting an
original.
WITNESS,
The Parties have executed this APA on the dates below.
[Taxpayer Name in all caps]
By: ___________________________
Date: _______________, 20___
Jane Doe
Sr. Vice President (Taxes)
IRS
By: ___________________________
Date: _______________, 20___
John E. Hinding
Director, Advance Pricing Agreement Program
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Appendix A
COVERED TRANSACTIONS AND TRANSFER PRICING METHOD (TPM)
1.
Covered Transactions.
[Deﬁne the Covered Transactions.]
2. TPM.
• CUP Method
The TPM is the comparable uncontrolled price (CUP) method. The Arm’s Length Range of the price charged for _________
is between _______ and ___________ per unit.
• CUT Method
The TPM is the CUT Method. The Arm’s Length Range of the royalty charged for the license of ______is between ____%
and ___ % of [Taxpayer’s, Foreign Participants’, or other speciﬁed party’s] Net Sales Revenue. [Insert deﬁnition of net
sales revenue or other royalty base.]
• Resale Price Method (RPM)
The TPM is the resale price method (RPM). The Tested Party’s Gross Margin for any APA Year is deﬁned as follows: the
Tested Party’s gross proﬁt divided by its sales revenue (as those terms are deﬁned in Treasury Regulations section
1.482¬5(d)(1) and (2)) for that APA Year. The Arm’s Length Range is between ____% and ___ %, and the Median of the
Arm’s Length Range is ___%.
• Cost Plus Method
The TPM is the cost plus method. The Tested Party’s Cost Plus Markup is deﬁned as follows for any APA Year: the Tested
Party’s ratio of gross proﬁt to production costs (as those terms are deﬁned in Treasury Regulations section 1.482-3(d)
(1) and (2)) for that APA Year. The Arm’s Length Range is between ___% and ___%, and the Median of the Arm’s Length
Range is ___%.
• CPM with Berry Ratio PLI
The TPM is the comparable proﬁts method (CPM). The proﬁt level indicator is a Berry Ratio. The Tested Party’s Berry
Ratio is deﬁned as follows for any APA Year: the Tested Party’s gross proﬁt divided by its operating expenses (as those
terms are deﬁned in Treasury Regulations section 1.482-5(d)(2) and (3)) for that APA Year. The Arm’s Length Range is
between ____ and ___, and the Median of the Arm’s Length Range is ___.
• CPM using an Operating Margin PLI
The TPM is the comparable proﬁts method (CPM). The proﬁt level indicator is an operating margin. The Tested Party’s
Operating Margin is deﬁned as follows for any APA Year: the Tested Party’s operating proﬁt divided by its sales revenue
(as those terms are deﬁned in Treasury Regulations section 1.482-5(d)(1) and (4)) for that APA Year. The Arm’s Length
Range is between ____% and ___ %, and the Median of the Arm’s Length Range is ___%.
• CPM using a Three-year Rolling Average Operating Margin PLI
The TPM is the comparable proﬁts method (CPM). The proﬁt level indicator is an operating margin. The Tested Party’s
Three-Year Rolling Average operating margin is deﬁned as follows for any APA Year: the sum of the Tested Party’s
operating proﬁt (within the meaning of Treasury Regulations section 1.482¬5(d)(4) for that APA Year and the two
preceding years, divided by the sum of its sales revenue (within the meaning of Treasury Regulations section 1.482-5(d)
(1)) for that APA Year and the two preceding years. The Arm’s Length Range is between ____% and ____%, and the
Median of the Arm’s Length Range is ___%.
• Residual Proﬁt Split Method
The TPM is the residual proﬁt split method. [Insert description of routine proﬁt level determinations and residual proﬁtsplit mechanism].
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3. Application of TPM.
For any APA Year, if the results of Taxpayer’s actual transactions produce a [price per unit, royalty rate for the Covered
Transactions] [or] [Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average
Operating Margin for the Tested Party] within the Arm’s Length Range, then the amounts reported on Taxpayer’s US
Return must clearly reﬂect such results.
For any APA year, if the results of Taxpayer’s actual transactions produce a [price per unit, royalty rate] [or] [Gross
Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating Margin for the
Tested Party] outside the Arm’s Length Range, then amounts reported on Taxpayer’s US Return must clearly reﬂect
an adjustment that brings the [price per unit, royalty rate] [or] [Tested Party’s Gross Margin, Cost Plus Markup, Berry
Ratio, Operating Margin, Three-Year Rolling Average Operating Margin] to the Median.
For purposes of this Appendix A, the “results of Taxpayer’s actual transactions” means the results reﬂected in
Taxpayer’s and Tested Party’s books and records as computed under US GAAP [insert another relevant accounting
standard if applicable], with the following adjustments:
(a) [The fair value of stock-based compensation as disclosed in the Tested Party’s audited ﬁnancial statements shall be
treated as an operating expense]; and
(b) To the extent that the results in any prior APA Year are relevant (for example, to compute a multi-year average), such
results shall be adjusted to reﬂect the amount of any adjustment made for that prior APA Year under this Appendix
A.
4. APA Revenue Procedure Treatment
If Taxpayer makes a primary adjustment under the terms of this Appendix A, Taxpayer may elect APA Revenue
Procedure Treatment in accordance with section 11.02(3) of Revenue Procedure 2006-9.
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Appendix B
CRITICAL ASSUMPTIONS
This APA’s critical assumptions are:
1. The business activities, functions performed, risks assumed, assets employed, and ﬁnancial and tax accounting methods
and classiﬁcations [and methods of estimation] of Taxpayer in relation to the Covered Transactions will remain materially the
same as described or used in Taxpayer’s APA Request. A mere change in business results will not be a material change.
Appendix C
APA RECORDS AND ANNUAL REPORTS
APA RECORDS
The APA Records will consist of:
1. All documents listed below for inclusion in the Annual Report, as well as all documents, notes, work papers, records,
or other writings that support the information provided in such documents.
ANNUAL REPORT
The Annual Report will include two copies of a properly completed APA Annual Report Summary in the form of Exhibit
E to this APA, one copy of the form bound with, and one copy bound separately from, the rest of the Annual Report. In
addition, the Annual Report will include a table of contents and the information and exhibits identiﬁed below, organized as
follows.
1. Statements that fully identify, describe, analyze, and explain:
a. All material differences between any of the US Entities’ business operations (including functions, risks assumed,
markets, contractual terms, economic conditions, property, services, and assets employed) during the APA Year
and the description of the business operations contained in the APA Request. If there have been no material
differences, the Annual Report will include a statement to that effect.
b. All material changes in the US Entities’ accounting methods and classiﬁcations, and methods of estimation, from
those described or used in Taxpayer’s request for this APA. If any such change was made to conform to changes
in US GAAP (or other relevant accounting standards), Taxpayer will speciﬁcally identify such change. If there has
been no material change in accounting methods and classiﬁcations or methods of estimation, the Annual Report
will include a statement to that effect.
c. Any change to the Taxpayer notice information in section 14 of this APA.
d. Any failure to meet any critical assumption. If there has been no failure, the Annual Report will include a statement
to that effect.
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29
e. Any change to any entity classiﬁcation for federal income tax purposes (including any change that causes an entity
to be disregarded for federal income tax purposes) of any Worldwide Group member that is a party to the Covered
Transactions or is otherwise relevant to the TPM.
f. The amount, reason for, and ﬁnancial analysis of any compensating adjustments under paragraph 4 of Appendix A
and Revenue Procedure 2006-9, section 11.02(3), for the APA Year, including but not limited to:
i. the amounts paid or received by each affected entity;
ii. the character (such as capital, ordinary, income, expense) and country source of the funds transferred, and the
speciﬁc affected line item(s) of any affected US Return; and
iii. the date(s) and means by which the payments are or will be made.
g. The amounts, description, reason for, and ﬁnancial analysis of any book-tax difference relevant to the TPM for the
APA Year, as reﬂected on Schedule M-1 or Schedule M-3 of the US Return for the APA Year.
2 The Financial Statements, and any necessary account detail to show compliance with the TPM, with a copy of the
independent certiﬁed public accountant’s opinion required by paragraph 5(f) of this APA.
3 A ﬁnancial analysis that reﬂects Taxpayer’s TPM calculations for the APA Year. The calculations must reconcile with and
reference the Financial Statements in sufﬁcient account detail to allow the IRS to determine whether Taxpayer has complied
with the TPM.
4 An organizational chart for the Worldwide Group, revised annually to reﬂect all ownership or structural changes of entities
that are parties to the Covered Transactions or are otherwise relevant to the TPM.
5 A copy of the APA.
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afﬁliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
30
Appendix D
DEFINITION
The following deﬁnitions control for all purposes of this APA. The deﬁnitions appear alphabetically below:
Term
Deﬁnition
Annual Report
A report within the meaning of Revenue Procedure 2006-9, section 11.01.
APA
This Advance Pricing Agreement, which is an “advance pricing agreement” within the
meaning of Revenue Procedure 2006-9, section 2.04.
APA Records
The records speciﬁed in Appendix C.
APA Request
Taxpayer’s request for this APA dated _________, including any amendments or
supplemental or additional information thereto.
Covered Transaction(s)
This term is deﬁned in Appendix A.
Financial Statements
Financial statements prepared in accordance with US GAAP and stated in US dollars.
Foreign Group
Worldwide Group members that are not US persons.
Foreign Participants
[name the foreign entities involved in Covered Transactions].
I.R.C.
The Internal Revenue Code of 1986, 26 U.S.C., as amended.
Pub. L. 106-170
The Ticket to Work and Work Incentives Improvement Act of 1999.
Revenue Procedure 2006-9
Rev. Proc. 2006-9, 2006-1 C.B. 278.
Transfer Pricing Method (TPM)
A transfer pricing method within the meaning of Treasury Regulations section 1.482-1(b)
and Revenue Procedure 2006-9, section 2.04.
US GAAP
US generally-accepted accounting principles.
US Group
Worldwide Group members that are US persons.
US Return
For each taxable year, the “returns with respect to income taxes under subtitle A”
that Taxpayer must “make” in accordance with I.R.C. section 6012. {Or substitute for
partnership: For each taxable year, the “return” that Taxpayer must “make” in accordance
with I.R.C. section 6031.}
Worldwide Group
Taxpayer and all organizations, trades, businesses, entities, or branches (whether or not
incorporated, organized in the United States, or afﬁliated) owned or controlled directly or
indirectly by the same interests.
Appendix E
APA ANNUAL REPORT SUMMARY FORM
The APA Annual Report Summary on the next page is a required APA Record. The APA Team Leader has supplied some of the
information requested on the form. Taxpayer is to supply the remaining information requested by the form and submit the form
as part of its Annual Report.
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afﬁliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
31
Sources
Canada
•
Information Circular 94-4R, International Transfer Pricing: Advance Pricing Arrangements (APAs), March 16, 2001,
Canada Revenue Agency
China
•
Chapter 6 and related provisions of the Implementation Measures of Special Tax Adjustments (Trial Version) (Guo
Shui Fa [2009] No. 2)
•
China Advance Pricing Arrangement Annual Report 2009, State Administration of Taxation, People’s Republic of China
France
•
Instruction 4 A-11-05, No.110 (6/24/2005) Instruction relative à la garantie prévue à l’article L.80 B 7e du Livre des
Procédures Fiscales et à la Procédure d’accord préalable unilatéral en matière de prix de transfert
Germany
•
Information on bi- or multilateral mutual agreement procedures under double taxation agreements for reaching
Advance Pricing Agreements (“APA”) aimed at granting binding advance approval of transfer prices agreed between
international associated enterprises, Federal Ministry of Finance, October 5, 2006. (File ref: IV B 4-S 1341 – 38/06)
Japan
•
Commissioner’s Directive on the Operation of Transfer Pricing (Administrative Guidelines), National Tax Agency of
Japan, June 1, 2001, amended June 25, 2007.
•
APA Program Report 2010, National Tax Agency of Japan
United Kingdom
•
Statement of Practice on Advance Pricing Agreements, issued by H.M. Revenue and Customs (HMRC), interpreting
Sections 218-230 of the Taxation (International and Other Provisions) Act 2010
United States
•
Revenue Procedure 2006-9, 2006-1 C.B. 278
•
Announcement and Report Concerning Advance Pricing Agreements, March 29, 2011
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32
Key contacts
Steven D. Harris
Steven D. Harris currently leads the APA initiative of KPMG in
India.
Steven came to KPMG in 1998 from the IRS APA Program,
where he served as team leader, branch chief and acting
director. During his tenure with the IRS, he also served as
the APA Coordinator for Canadian and Japanese cases. While
with the IRS, Mr. Harris participated in numerous bilateral
APA discussions and negotiations with tax authorities around
the world (including Japan, Canada, UK, Mexico, Germany) to
resolve transfer pricing disputes. From 2000 until 2009,
Mr. Harris was the Practice Leader for KPMG’s Global Transfer
Pricing Resolution Network, which provides assistance
to member ﬁrm clients on resolving cross-border transfer
pricing controversies through mechanisms such as Advance
Pricing Agreements and Competent Authority.
Rohan K. Phatarphekar
Rohan K. Phatarphekar is a partner and is the National Leader
of KPMG in India’s Transfer Pricing Practice. Mr. Phatarphekar
has been rated in the Top 10 Transfer Pricing advisers in India
in a survey carried out amongst Indian taxpayers in January
2011 by International Tax Review (ITR).
Rohan leads a team of over 175 transfer pricing professionals
spread across seven locations in India. He has been advising
multinational companies on transfer pricing issues from 1997
much before the transfer pricing regulations were introduced
in India in 2001. The annual Euromoney publication, World
Tax 2011 acknowledged that KPMG in India has a strong
reputation for Transfer Pricing Services under the leadership
of Mr. Phatarphekar. Also, KPMG in India has been awarded
the ‘India Transfer Pricing Firm of the Year‘by ITR.
Mr. Phatarphekar has serviced clients across various
industries including Pharma, IT, ITES, Infrastructure, Financial
Services, Electronics, FMCG etc.
Contributors to the paper:
Steven D. Harris, Rohan K. Phatarphekar and Carolyn D. Fanaroff
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afﬁliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
KPMG in India
Bangalore
Maruthi Info-Tech Centre
11-12/1, Inner Ring Road
Koramangala, Bangalore 560 071
Tel: +91 80 3980 6000
Fax: +91 80 3980 6999
Kochi
4/F, Palal Towers
M. G. Road, Ravipuram,
Kochi 682 016
Tel: +91 484 302 7000
Fax: +91 484 302 7001
Chandigarh
SCO 22-23 (Ist Floor)
Sector 8C, Madhya Marg
Chandigarh 160 009
Tel: +91 172 393 5777/781
Fax: +91 172 393 5780
Kolkata
Inﬁnity Benchmark, Plot No. G-1
10th Floor, Block – EP & GP, Sector V
Salt Lake City, Kolkata 700 091
Tel: +91 33 44034000
Fax: +91 33 44034199
Chennai
No.10, Mahatma Gandhi Road
Nungambakkam
Chennai 600 034
Tel: +91 44 3914 5000
Fax: +91 44 3914 5999
Mumbai
Lodha Excelus, Apollo Mills
N. M. Joshi Marg
Mahalaxmi, Mumbai 400 011
Tel: +91 22 3989 6000
Fax: +91 22 3983 6000
Delhi
Building No.10, 8th Floor
DLF Cyber City, Phase II
Gurgaon, Haryana 122 002
Tel: +91 124 307 4000
Fax: +91 124 254 9101
Pune
703, Godrej Castlemaine
Bund Garden
Pune 411 001
Tel: +91 20 3058 5764/65
Fax: +91 20 3058 5775
Hyderabad
8-2-618/2
Reliance Humsafar, 4th Floor
Road No.11, Banjara Hills
Hyderabad 500 034
Tel: +91 40 3046 5000
Fax: +91 40 3046 5299
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afﬁliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Contact us
Steven D. Harris
Senior Principal
Global Transfer Pricing Services
KPMG in US
T: +1 212 872 6718
E: [email protected]
Rohan K. Phatarphekar
Executive Director and National Head
Global Transfer Pricing Services
KPMG in India
T: +91 22 3090 2000
E: [email protected]
www.kpmg.com/in
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no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate
in the future. No one should act on such information without appropriate professional advice after a thorough
examination of the particular situation.
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afﬁliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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