Advance Pricing Arrangements
[Submitted by CA. Bhavik Bipin Mehta,
B.Com, Chartered Accountant,
Mumbai, Maharashtra]
October 16, 2009
Background:
Advance Pricing Arrangements (APA) started in 1987 making Japan the first country in the world to implement such a procedure. USA used APA as an effective tool to reduce administrative burden and also, to provide a predictability of transfer pricing methodology. Several countries followed suit and success ratio of implementation of APA is high.
APAs are now proposed to be introduced in India under the New Direct Taxes Code, 2009. Detailed guidelines for the same are expected in coming months.
APAs – Why Now?
Cross border transactions have increased tremendously. There is an increase in International tax avoidance due to which there is sharp rise in litigation in the field of International Taxation. Taxpayers demand certainty in taxation. APAs are now-a-days gaining global acceptance. Globally 60% of cases under mutual agreement procedure (MAP) are related to transfer pricing. Also, governments of foreign countries are also actively examining transfer pricing.
Understanding of APAs:
An APA is an advance pricing arrangement between the tax authorities and a taxpayer. It covers certain transactions and arrangements between the taxpayer and non-resident entities. APAs confirm appropriate transfer pricing methodologies, in advance, and their application to specific cross-border non-arm’s length transactions or arrangements for specified periods of time, under specified terms and conditions.
Types of APAs:
- Unilateral – APA between taxpayer & tax authority of domestic country
- Bilateral – APA between taxpayer & two tax authorities
- Multilateral - APA between taxpayer & multiple tax authorities
When appropriate, the competent authorities may enter into a Bilateral APA or Multilateral APA with its foreign counterparts under the mutual agreement procedure (MAP) article of the relevant income tax treaty.
Benefits of APA:
Benefits include
- long-term time savings,
- efficient resolution of recurring complex matters,
- greater certainty about transfer pricing issues,
- potential application of findings to past years,
- minimization of global risk,
- binding on Assessing Officer,
- may avoid audit under covered transactions,
- eliminates the need to prepare annual TP documentation.
Coverage of APA:
Complexity of the case will determine the time needed to approve an APA. Only specified future transactions will be covered and not hypothetical transactions. For similar issues, TPO may decide to apply APA retrospectively to non statute barred taxation years. Request can be made during the scrutiny itself to apply the APA findings in that year’s case. Each APA is unique and depends on the facts and circumstances of each case. Similar Issues like Attribution of Profits to PE may also be covered.
Specifics of APA:
APA will specify:
- taxpayer and non-resident entity
- nature of transactions
- method to be applied
- duration of APA
- terms and conditions for revisions, terminations, etc.
- APA reports/compliances to be filed
- timelines
- other matters, etc.
Stages of an APA:
The APA process includes the following stages:
- pre-filing meeting(s);
- APA request;
- acceptance letter;
- APA submission;
- preliminary review of the APA submission and establishment of a case plan;
- review, analysis, and evaluation;
- negotiations;
- agreements;
- the post-settlement meeting; and
- APA compliance.
Pre-filing meeting:
Meeting should be conducted within 180 days from the end of the first taxation year; otherwise first taxation year may not be covered. This meeting is a preliminary informal discussion of an APA. This will help ITD to accept the APA request at a later stage. APA request information should be given be given two weeks before the meeting. Taxpayer will understand/get to know the type of information that will be required.
A pre-filing meeting will give opportunity to discuss:
(a) specific parties and participants to be included in the APA process (unless the pre-filing meeting is conducted on an anonymous basis);
(b) nature and scope of the transactions to be covered under the APA;
(c) data, documentation, and analyses that may be needed;
(d) possible need for independent experts;
(e) proposed TPMs;
(f) countries involved, your desire for a unilateral, bilateral, or multilateral APA, and the possibility for a BAPA or MAPA among the relevant competent authorities;
(g) APA years to be covered;
(h) possible retroactive application of the APA;
(i) possible need for waivers;
(j) use, disclosure, and protection of information obtained or generated during the APA process;
(k) estimated user charge;
(l) Department team members;
(m) department’s commitment to accept the APA request; and
(n) co-ordination and scheduling of the subsequent phases in the APA process.
APA submission:
Information filing package should contain the following:
(a) the global organizational structure and the industry in which it operates;
(b) the parties, participants, and transaction flows proposed to be covered;
(c) the transfer pricing, audit and reassessment history, and related domestic or foreign tax audit issues and status;
(d) the history of competent authority issues, requests, and settlements;
(e) the reasons for requesting the APA;
(f) relevant transfer pricing policies, methodologies, practices, and accounting systems and policies;
(g) the Transfer Pricing Methods (TPMs) contemplated under the APA and the underlying rationale;
(h) the impact of the proposed TPMs on taxable income;
(i) relevant key interpretative or technical taxation issues;
(j) the reasons for requesting a BAPA or MAPA, the countries involved, and the nature and extent of previous communications
with those tax administrations;(k) the key individuals (including taxpayer’s officials or employees and any experts, advisors, and other representatives) who
will be involved throughout the APA process; and(l) other information you consider pertinent.
Processing an APA request
Generally acceptance letters are issued within 45 days of APA request. Letter will mention the charges to be paid & other terms. All correspondence may be transmitted electronically; if authorization for the same is given in APA request. Case plan may be given in the acceptance letter along-with target dates/timelines.
Declining APA request
APA request may be declined. For example, any APA request that is subject matter at higher courts may be declined. After acceptance, APA may be declined only under exceptional circumstances. After declining, reasonable opportunity will be given to taxpayer to make further representations.
Withdrawal of APA request
It can be withdrawn at any time. Any previous undertakings and understanding will not have any force.
User charges
There will be non-refundable charges and anticipated out of pocket charges. Need for travel have to be evaluated.
Case assignment
A multi disciplinary team will be assigned. It will comprise of accountant/auditor, economist, tax specialists and legal counsel. The team will be led by a case officer. Case officer will contact within 30 days after receiving signed acceptance letter.
APA submission
Information disclosed to the tax department should be true and appropriate. Case Officer will discuss draft plan with assessee/representative, participating foreign tax administration, etc. Details demanded by case officer should be instantly given on request; otherwise tax department reserve the right to terminate the process.
Explanation of proposed TP method
Discuss the proposal and make an analysis in accordance with rules and OECD guidelines. Assessee should explain why his proposal is appropriate. In case of MAPA, business conditions may differ; therefore same terms and conditions may not be suitable. Show the effect of proposed method on last three years and current business cycle. This data is required for testing purposes. If assessee feels, that previous three years data will be inappropriate then he may choose some other time period. In case, the proposed TPM applies to new processes, products, business segments/activities, then alternative data may be necessary.
Independent expert
Assessee may mention in APA request that an independent expert will be required. Expenses will be borne by assessee. Experts opinion will not be binding for tax authorities.
Critical assumptions
Assessee may disclose the set of assumptions made under which the proposed TPM would operate. APA may be cancelled if there is failure to meet the assumptions. On failure of assumption, parties will discuss how the APA can be revised
Term of an APA
Assessee should mention the term in APA request after due regard to industry, markets and transaction involved.
Review of APA
Team may conduct field/site visits to gain better understanding of markets and industry and gather more information. Team may ask assessee to do additional accounting or economic analysis. At the end of the review, department positions will generally be finalized within 12 months.
Negotiations
In case of competent authority negotiation between two countries, assessee will not participate but will be called upon to solve queries or respond to certain questions. The authorities may conclude the BAPA within 30 days; then they will enter into an APA with taxpayer. In case of unilateral; APA may be concluded within 60 days of confirmation of terms and conditions.
Post-settlement
Department may arrange a post-settlement meeting with assessee to discuss terms of settlement, renewal considerations, the timeliness of the process, and any problems encountered during the process. This stage is intended to give both parties the opportunity to provide and receive feedback on their experiences and concerns, and to make sure that the process is continuously updated and improved.
Confidentiality
Except as provided by written agreement; information disclosed during APA process will not be used for any judicial enquiry in relation to any taxation year. Certain statistics may be disclosed in public domain.
Avoidance of double taxation
The purpose of pursuing a BAPA or MAPA is to avoid double taxation between assessee and a non-resident entity, which may happen when only a unilateral APA is in place.
The APA process achieves maximum benefits when the competent authorities of two or more countries reach a BAPA or MAPA. If the competent authorities cannot reach a BAPA or MAPA, they may, nevertheless, provide a unilateral APA.
Developed countries mostly prefer BAPA or MAPA. Incase, taxpayer wants to go for Unilateral APA then the reason for not going for BAPA or MAPA should be given in APA request; incase India has a treaty with that country.
Incase, Unilateral APA is accepted by tax authorities, then tax treaty partner can be notified by the Indian tax department. This may be helpful while resolving disputes under MAP.
If for any reason a BAPA or MAPA has not been concluded, and assessee and the CCRA have concluded a unilateral APA, assessee retains the rights to pursue the mutual agreement procedure available under the relevant tax treaty.
However, if double taxation occurs on the transactions covered by unilateral APA, the domestic competent authority may, under the mutual agreement procedure article of the relevant tax treaty, deviate from the terms and conditions in unilateral APA to resolve the matter with the relevant treaty partner. If assessee and the non-resident entities accept the settlement negotiated by the domestic competent authority and the relevant foreign competent authority regarding the parties and transactions specifically covered by unilateral APA, it will prevail over the terms and conditions of unilateral APA.
Administering an APA
Assessee will be required to file reports of its operation. APA report has to address all items described in the APA
Auditing an APA
Assessee and non-resident entity must maintain proper books of accounts. TPOs audit APA as part of their routine cycle.
Cancelling an APA
An APA may be cancelled if the department finds that there is material misrepresentation, mistake, omission in submission, failing to supply information, failure to comply any material term, failure to meet critical assumption, change in law including treaty modification, foreign tax administration has revised or cancelled the APA. Cancellation order will give grounds for cancellation. After cancellation, Act and treaty will apply for previous taxation years.
Revision of APA
Same process has to continue. Revision application can be made not later than nine months before expiry of APA. Proposed amendments to APA, revised study analysis, reports should be submitted.
Ten Commandments of APA negotiation:
- Treat APA same as any business negotiation
- Make it enjoyable
- Include all relevant information in APA request
- Demonstrate your flexibility
- Tell the department what you want
- Do not make negotiations adversarial
- Do not misrepresent facts
- Do not fail to raise important issues
- Do not undermine the team leader
- Do not issue ultimatums
