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.