Advance Pricing Agreements (APA) - Preventing Future Tax Controversies for Tax Payers

NEW DELHI, December 9, 2016 /PRNewswire/ --

In an environment where the government has been trying to attract multinational enterprises to 'Make in India', it is time to introduce initiatives or measures to signal a clear focus on making doing business in India easier. One such initiative has been the introduction of APA programme. 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 domestic appeal and dispute resolution process in India is slow and very time consuming. Therefore, the need for an alternative dispute resolution mechanism such as the Advance Pricing Agreement (APA) program, which provides a proactive opportunity for taxpayers to not only prevent future tax controversies but also to provide a rational basis for settling past disputes where an APA outcome may have a significant persuasive value, said Swati Aggarwal, Senior Manager (International Taxation) of Neeraj Bhagat & Co., a Chartered Accountancy firm based out of New Delhi.

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The various aspects of rules/ guidelines governing APA and certain operational matters relating to APA are analyzed below:

What is an Advance Pricing Agreement (APA)?  

An APA is an agreement between a tax payer and tax authority determining the transfer pricing methodology for pricing the tax payer's international transactions with its associated enterprises (AE's) for future years. The methodology is to be applied for a certain period of time based on the fulfillment of certain terms and conditions. These programmes are designed to help taxpayers voluntarily resolve actual or potential transfer pricing disputes in a proactive, cooperative manner, as an alternative to the traditional examination process.

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 [Direct Taxes Code (the 'DTC', Sec. 118(5)] unless there is a change in law or facts relating to the agreement.

At present, a parallel mechanism exists i.e. advance rulings from the Authority for Advance Rulings (AAR). AAR is empowered to examine a prospective contract of a resident taxpayer with a non-resident in order to determine the taxability thereof. The main difference is that under the APA scheme, the tax authorities may determine/quantify the value of the international transaction or profits, whereas the Authority for Advance Rulings does not have a power to do so. In India, the Board limits 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.