cutting through complexity
India's New AdvancePricing Agreement(APA) Program
Presenter
Alpana Saksena
International Tax ConferenceMumbai
Dec 7, 2012
/
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You (and your employees, representatives, or agents) may disclose to any and all persons, withoutlimitation, the tax treatment or tax structure, or both, of any transaction described in the associatedmaterials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax
analyses contained in those materials.
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India - Traditional Dispute resolution - An Overview
Level of authority / Court
Transfer Pricing audit 4 years from date of filing returnOften repetitive additions
DRP/1s t Appeal(Commissioner
(Appeals)9 months to 3 years
Final authority onfactual issues
2nd AppealIncome tax Appellate
Tribunal2 - 3 years
Only substantialquestions of law
3rd AppealHigh Court
5 years
Final AppealSupreme Court
Domestic litigation - Total time 15 years +
5 years
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APA Program in India
Legislative Provisionsand Procedure
(Announced in Budgetof March 2012)
APA Program - Basic Legislative Provisions
Sections 92CC to 92CD of Income Tax Act 1961f independent member firms affiliated with KPMG
APA Rules - Operating Guidelines(Announced 30th Aug 2012)
APAs can be unilateral as well as bilateral / multilateral
Transactions to be covered• existing transactions (application to be filed by March 31 for transactions beginning 1s t April)• new international transactions (application can be filed before undertaking transactions)
Pre-filing consultation mandatory - specified format (anonymous option available)
Specified format for APA application - withdrawal / renewal of APA possible
Schedule of APA fees
Particulars
Transaction value up to INR 1 bn (approx USD 20 mn)
Transaction value up to INR 2 bn (approx USD 40 mn);
Transaction value above INR 2 bn (approx USD 40 mn)
Fees
INR 1 million (approx USD 20,000)
INR 1.5 million (approx USD 30,000)
INR 2 million (approx USD 40,000)
APA teams to include panel of specialists such as economists, statisticians, etc
Annual compliance report required , compliance audit would follow.
Rules 10F to 10T of the Income Tax Rules 1962
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APA process
Mandatory Pre-filing Consultation
iUnilateral APA BAPA MAPA
I Application
DGIT Indian CA
Applications checked for deficiencyopportunity to correct available
Other CA
MAP Arrangement
APA Team includingindependent experts
Hearings,info requests,site visits
i
Mutually agreed draftAPA to be prepared
Final APA
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APA Process - A quick overview
Pre-filing Post-prefiling PhaseApplication for pre-filingconsultation
Key milestones
Pre-filing> Consultation
(Form 3CEC)
Key details
Concluding pre-filingconsultation
Formal APA applicationlodged Concluding APA
Pre-filingProcess and
Outcome
The APAApplication(Form 3CED)
Negotiation &Settlement
AnnualCompliance(Form 3CEF)
Prescribed formatrequires details of:
Coveredtransactions,
Functions, assets,risks
Proposedbenchmarkingmethodology, PLI,Comparables
Critical assumptions
Past audit history
APA team holdsconsultations to
Exploresuitability of APA
identify issuesfor detaileddiscussion
Discuss scope ofcoveredtransactions
Are non bindingOutcome will beconveyed inwriting
Detailedapplicationdevelopinginformationprovided at pre-filing stage
Forecastsestimatesrequired
• Submission reviewedby APA Team
Site visits,discussions, jointmeetings to gain abetter understanding
After review, analysis& evaluation stage,positions of the APAteam is discussedand agreed with thetaxpayerAPA signed
Taxpayer to file aYOY compliancereport with todemonstratecompliance withAPA terms
TPO to conductcompliance audit,to verifycompliance withAPA terms
TPO to submitaudit report to DGITwithin 6 months
affiliated with KPMG
Mandatory Prefiling - The gateway to APA
WhyAdvantageous?
Affords an opportunity to test waters, gauge receptivity of revenueIdentify issues that will require specific development
help taxpayer decide whether APA can be achievedfees for prefiling
AnonymousAdvantageous to taxpayers with difficult dispute history
of anonymity could help in frank discussions
Preparationrequired
Requires similar preparation as for TP Audit report
Structured format gives clarity in respect of information required
Advantageous evenif APA not pursued
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Pre-filing could be instructive
Could provide valuable insights into strength and weakness ofAPA proposal and business strategies and models
Assist in being better prepared for TP audit
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Typical Transactions for APAs
India specific transactions suitable for APAs
Software development & ITES services
Management services and royalty pay outs
Contract R&D (Pharma / Software)
Contract manufacturing
Intercompany loans, advances and guarantees
Distributors and marketing intangibles
Start up companies with losses
Any new transactions - no dispute history
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Are you ready for an APA? Options to pursue?
Nature oftransactions
Cost benefitAnalysis versus
outcome
Looking forcertainty ?
When unilateral
Transactions critical to businessIn perpetual dispute and litigationNew transaction - possibility of disputeLosses / contentious audit triggers
ProbablyYes
Time / expense/ resources vs size of transactionsTransactions too small and simple [No disputes with tax authoritiesOutcome of audit vs APA would be similar
Regardless of nature of transactionsTax authorities habitually aggressiveLitigation processes lengthy / outcomes uncertainGoal is to manage potential controversy
When the dispute is primarily in IndiaIf relationships between CAs strainedIf APA program new in country of operation
ProbablyYes
Othercases
Bilateral
When bilateralTransactions are interdependentWhere the anticipated outcome in India may be differentand therefore needs to be agreed upon with overseas CAWhen possibility of economic double taxation exists
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Possible Pros & Cons of an APA
Anonymous pre-filing consultation has specific advantages
APA gives Certainty for 5 years -prospect of renewal for 5 more years
simpler compliances after APA has been entered into
Reduces documentation burden
Time and cost saving
Preferred by tax authorities
Possible persuasive value in litigation and open audit years.
Modest upfront cost
No time limit prescribed under the APA rules
Detailed information required in pre-filing /for APA application
No rollback provisions
Bilateral APAs dependant on relationship with treaty partner
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Indian Revenue- Positive Perspective on APA Program
APA program based on International Best Practices
Revenue APA team has been proactive and positive in its approach
The key perspectives of the APA team are :
• To reduce litigation and provide certainty
• Early filings - could leading to possible first mover advantage/ quick resolution
• Negotiation with open mind in collaborative environment
Adverse audit history - not to impact negotiations
• APA proposal to be looked at from a fresh perspective
• Not bound by past history
• Attempt to reconcile differences /contentious positions
• Open to mutually agreeable solutions
Changed attitude reflected in composition of APA teams, specialists included in teams
"We agree that implementation will be the key and I can assure you that the Indiantax administration is keen to make this APA program a huge success."DGIT, Mrs. Promila Bhardwaj during the first ever webinar initiated by KPMG in September 2012
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APA - Regulatory Set-up in India
Chairman CBDTDr. Poonam Kishore
Saxena
I•
DGITMntlTax)Promila Bhordwoj
Commissioner APAKamlesh Varshney
Competent AuthoritySanjay Kumar Mishra
Mumbai BengaluruM M
Director APABatsala Jha Yadav
Addl. Joint DeputyCommr Commr Commr(APA) (APA) (APA)Manoj Sobhan S.K.Pandey Kar Chatterjee
UNILATERAL
BILA TERAL/ MULTILA TERAL
Asst.Commr(APA)Neha
Chaudhary
Addl.Comm.(APA)
VikramBatra
DeputyCommr(APA)DileepKumar
JointCommr(APA)Satya
SaiRath
DeputyCommr(APA)KiranKatta Under
SecretaryAPA-IAshishHelewal
UnderSecretaryAPA-IIMirnaliniKaurSapra
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Abbreviations
APA - Advance Pricing Agreement
ALP - Arm's Length Price
AEs - Associated Enterprises
Board / CBDT - Central Board of Direct Taxes
BAPA - Bilateral APA
CIT - Commissioner of Income Tax
MAP - Mutual Agreement Procedure
MAPA-Multilateral APA
TP - Transfer Pricing
TPO - Transfer Pricing Officer
PLI - Profit Level Indicator
USD - United States Dollar
CT - Covered Transactions
CA - Competent Authority
DGIT- Director General Income-tax (International Tax)
DTAA - Double Taxation Avoidance Agreement
FAR - Functions, Assets and Risks Analysis
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