Backdrop of APA introduction
As widely reported, the conclusion of latest transfer pricing audits by Indian revenue authorities witnessed aggregate income adjustments to the tune of Rs 44,000 crore for one year alone, which is more than the aggregate income adjustments made by revenue authorities in audits of previous 4 years.
To address the year-on-year rapid escalation in transfer pricing disputes and to address the current dire need of Corporate India, the Union Budget 2012 tabled in the Parliament earlier introduced a very important dispute resolution mechanism, the Advance Pricing Agreement (APA) scheme. This mechanism is widely prevalent in countries with advanced transfer pricing regimes.
The APA scheme was already a part of the proposed Direct Taxes Code, 2010 (DTC), however given the delay in promulgating the DTC, and the pressure on the Government to contain the spiraling increase in the transfer pricing disputes, the APA scheme is now close to being a reality.
Key highlights of the APA scheme
At present, only a basic framework has been provided in the Budget and the Central Board of Direct Taxes (CBDT) has been empowered to frame a scheme for APAs. Therefore, the finer details of the APA regime would follow at a later date and until such time taxpayers will have to wait to access the APA route. The key highlights of the APA provision are as follows:
1. Available to all taxpayers falling within the ambit of Indian TP legislation. No threshold limit prescribed.
2. The APA enabling provisions are imported from the DTC and detailed Rules and Forms expected to be issued by the Government. Although, no time frame is specified but given that budget is likely to be enacted by end of May, the notification of rules is likely in June-July 2012.
3. APAs to be entered by the CBDT with the approval of Central Government.
4. Ability to use any method other than one of the prescribed 5 methods available. This will enable the tax payer to negotiate an economic method or put across a business rationale to explain the proposed transfer price.
5. The APA can be applied for a period of 5 consecutive previous years.
6. The Revenue Department is prepared with field formations and the APA Directorate is expected to be based in Delhi with facilitation desks in Mumbai and Bangalore.
7. The APA has binding force only on the taxpayer with whom it is signed and in respect of the relevant international transaction vis-à-vis the jurisdictional Commissioner of Income-tax.
8. The APA shall not be binding / annulled in the following instances:
i. Change in Law.
ii. If the taxpayer has signed the APA with the CBDT based on misrepresentation of facts. CBDT will annul in this case by way of an order.
iii. On conclusion of APA, the taxpayer is required to file revised return(s) with the Assessing Officer who has to complete the assessment / reassessment within one year from the end of the financial year in which the revised return is filed.
In terms of expectation from the specific rules, important issues like time frame, whether the APAs would be Unilateral / Bilateral, whether they would encourage a pre-filing conference, whether rollbacks would be permitted, whether an independent agency to monitor and implement this would be appointed is to be understood. However, broadly the scheme should be such that it acts as an overall progressive catalyst to resolve the transfer pricing disputes.
Who should access the APA scheme and HOW?
The APA scheme is ideal for taxpayers:
i. Who wish to have tax certainty and elimination of double taxation.
ii. Who have complex transactions where differing views are likely to arise in respect of transfer pricing.
iii. Who wish to avoid the possibility of dedicating significant resources to an extensive transfer pricing audit.
The APA process with the Revenue is expected to be broadly similar to a Revenue audit except that in this case once it is agreed, it would be applicable to multiple years and therefore the taxpayer can avoid prolonged audit and litigation time and cost.
As of now although it is early days for you to make any definite plans on accessing the APA scheme by taxpayers, this definitely is an opportune time to discuss and evaluate as to the relevance of this scheme to your business. We will be glad to handhold you in your decision making process and help you navigate the current complexities in a dynamic transfer pricing environment. We encourage you to look forward to our thought leadership publication on the APA scheme in the near future.