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Transfer pricing with APAs

Transfer pricing made easy with APAs

Over the past few years, the number of transfer pricing audits has been increased and aggressive positions have been adopted by the Indian Revenue Authority, which has contributed to long drawn and protracted litigation. The Central Board of Direct Taxes (CBDT) signed nine unilateral advance pricing agreements (APAs) with Indian taxpayers in July, this year, as it looks to reduce litigation by providing certainty in transfer pricing.
The APA program is designed to avoid the conflict arising in an audit and to nurture more effective communication between taxpayers and the Indian Revenue Authority, by helping both the parties to focus on relevant facts and circumstances in advance.

Advance pricing agreement (APA)
An APA is an agreement between the taxpayer and tax authority determining the pricing of intercompany transactions for future years. In case of a roll-back, it would also include past years. The taxpayer and tax authority mutually agree on the transfer pricing methodology (TPM) to be applied for a certain period of time (generally five years) based on the fulfillment of certain terms and conditions. APA is an effective tool used in several countries with established transfer pricing regimes to avoid future disputes in a cooperative manner.

 APAs pin down

  • Transactions covered by an APA
  • Transfer pricing method (TPM)
  • APA term
  • Operational and compliance provisions
  • Appropriate adjustments
  • Critical assumptions regarding future events
  • Required APA records
  • Annual compliance reporting responsibility

 Types of APAs

  • Unilateral: An APA between a taxpayer and the tax administration of the country where it is subject to taxation.
  • Bilateral: An APA entered into by the taxpayers, associated enterprise (AE) of the tax payer in the foreign country, the tax administration of the host country and the foreign tax administration.
  • Multilateral: An APA that involves the tax payer, two or more AEs of the tax payer in different foreign countries, tax authority of the country where the tax payer is located and the tax authorities of AEs.

 Key benefits of an APA

  • An APA provides certainty on transfer pricing and the TPM to be adopted for intercompany transactions covered under agreement.
  • Certainty with respect to tax outcome of the tax payer’s international transactions.
  • A bilateral or multilateral APA also wipes out the risk of potential double taxation arising from controlled transactions.
  • Removal of an audit threat and deliverance of a particular tax outcome based on the terms of the agreement.
  • Substantial reduction in risk and cost associated with audits and appeals over the APA term.
  • For tax authorities, an APA reduces cost of administration and also provides with additional resources.
  • APA renewal provides an excellent leverage of time and efforts expended during negotiating the original APA. The Indian APA rules also allow the taxpayer to convert a unilateral into bilateral and vice-versa, if required.

Consequently, APAs provide a win-win situation for all the stakeholders involved.

 The APA process in India
In line with APA process in other countries around the world, the Indian APA rules prescribe a process that breaks into the following four phases:

  • Pre-filing consultation: The process for APA would start with pre-filing consultation meeting. The taxpayer can request for a pre-filing consultation meeting which shall be held with the objective of determining the scope of the agreement, understanding the transfer pricing issues involved and examining the suitability of international transactions for an APA. The taxpayer also has an option of applying for a pre-filing consultation on an anonymous basis. This process is non-binding on the taxpayers and the Revenue. Taxpayer is required to fill form (From No. 3CEC) for a pre-filing consultation. It is vital not only to the APA process, but also to determine the course of the APA.
  • Formal APA application: After the pre-filing meeting, if the taxpayer is desirous of applying for an APA, an application would be required to be made in prescribed form (Form No. 3CED) containing specified information. The APA application filing fee is also payable at this stage.
  • Negotiation: Once the application is accepted, the APA team shall hold meetings with the applicant and undertake necessary inquiries relating to the case. Post the discussion and inquiries, the APA team shall prepare a draft report which shall be provided to the Competent Authority (for bilateral / multilateral APA), or DGIT (for unilateral APA).
  • Finalization: This phase involves exchange of feedbacks on draft APA, finalization of the APA and giving effect to the initial years covered under the APA term that have already elapsed.

 Statutory fee for filing an APA application
The APA filing fee, i.e. fee to be paid while filing the formal APA application is dependent upon the amount of the proposed covered transactions over the proposed APA term, as below:

  • INR 1 million for international transactions up to INR 1 billion
  • INR 1.5 million for international transactions up to INR 2 billion
  • INR 2 million for international transactions greater than INR 2 billion

*No fee prescribed for the pre-filing consultation process.

If you require any assistance on transfer pricing documentation including transfer pricing reports, Form- 3CEB and Advance Pricing Agreements (APA), you may reach us.

Audit under GST

GST Audits- An overview

Section- 2(13) of the CGST Act defines Audit as the examination of records, returns and other documents maintained or furnished by the registered person under the Act / rules made there under or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of the GST Act or the rules made thereunder.

*No audit is required for businesses with turnover less than INR 2 crore.

Types of GST Audit
There are 3 types of GST audits:

  1. Audit to be conducted by a Chartered Accountant or a Cost Accountant: Every taxpayer with revenue exceeding the prescribed limit of INR 2 crore during a financial year shall get his accounts audited by a Chartered Accountant or a Cost Accountant. Such taxpayers whose audit is conducted by a Chartered or Cost Accountant shall submit:
  • An annual return by filling the form GSTR 9B along with the reconciliation statement by 31st December of the next financial year;
  • The audited copy of the annual accounts;
  • A reconciliation statement, reconciling the value of supplies declared in the return with the audited annual financial statement; and
  • Other particulars as prescribed.
  1. Audit to be conducted by the tax authorities: As per Section 65 of the CGST / SGST Act, the Commissioner or any officer of CGST or SGST or UTGST authorized by him by a general or specific order, may conduct audit of any registered / enlisted individual. Intimation of the audit is provided to the taxpayer at least 15 days in advance in Form GST ADT-01 and the audit is to be completed within 3 months from the date of commencement of the audit. In rare cases, the GST Commissioner has the powers to extend the period by another 6 months, if required.
  2. Special Audits: If at any stage of investigation or any other proceedings, tax authority is of the opinion that the value has not been correctly declared or credit availed is not within the normal limits, department may order special audit under the mandate of Section 66, by its nominated Chartered Accountant or Cost Accountant.

The Chartered Accountant or Cost Accountant so nominated shall submit audit report to tax officer within the period of 90 days. This period may be extended further for 90 days by tax officer on application made by registered person or the chartered accountant. The registered person shall be given an opportunity of being heard in respect findings of special audit. The expenses of the audit of records, including the remuneration of such chartered accountant or cost accountant shall be paid by the Commissioner.

Where the special audit conducted results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilized, the officer may initiate required action.

Obligations of the Auditee
Auditees shall have following obligations during the course of audit:

  • The taxable person will be required to provide the necessary facility to verify the books of account / other documents as required.
  • The auditee needs to furnish the required information and render assistance for timely completion of the audit.

Findings of the Audit
On conclusion of an audit, the officer shall inform the taxable person within 30 days of:

  • Findings of audit;
  • Their reasons; and
  • The taxable person’s rights and obligations.

Where the audit conducted under sub-section (1) results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilized, the proper officer may initiate action under section 73 or section 74.

If you are facing challenges in compliance with GST or require any assistance in GST audits, you may reach us. For any questions regarding this, please click here.

GST adviser in India

Highlights of 29th GST council meeting

The 29th GST Council meeting chaired by Union finance minister Piyush Goyal was held at New Delhi on the 4th August, 2018. The meeting was aimed to address the issues of the Micro, Small and Medium Enterprises (MSMEs).

Key decisions taken by council in the meeting

Incentivizing digital transactions
Federal indirect tax body the GST Council, keeping in mind the end goal of digitalization of the economy, enhancing tax compliance and elevating the collection of tax has decided to incentivize digital payments of tax. The council came up with plan to roll out a pilot project for refunding 20% of GST paid on business-to-consumer transactions through RuPay card, BHIM mobile application, unified Payment Interface (UPI), debit card etc.

To implement this, the IT system has to get ready first. Therefore, government will develop the software in assistance with NPCI to process the cashback. The cashback is subject to a cap of INR 100.

Addressing MSME issues
The Micro, Small and Medium Enterprises (MSMEs)  play a significant role in country’s development, by the volume of revenue & employment it generates. The sector contributes to half of the exports and around 29% of the GDP.

The GST council has decided to form a new panel to examine a series of tax and compliance relief proposals pertaining to MSME and small traders. Panel to be chaired by union minister of state for finance Shiv Pratap Shukla will examine all proposals received so far regarding tax relief including the proposal to give relief to MSMEs with sales up to INR 1.5 crores from the central GST (CGST). This would restore the excise duty exemption available to these businesses in the pre-GST era.

This penal will do in depth study of the issues related to MSMEs and small taxpayers and thereafter will submit their findings and recommendations before GST Council.

No GST rate cut
Owing to lower GST revenues, no decisions were taken on the rate cut or rate rationalization. Also, there was no discussion on the GST return filing form simplification either.

The next meeting of the GST Council will be held on 28-29 September in Goa. For further updates stay tuned here!

For any query on this, reach our GST advisors.