The Indian Government has begun serious deliberations on introducing the Advance Pricing Agreement (APA) programme in India.
An APA is a binding contract between a taxpayer and the tax authority under which the two parties agree on the transfer pricing policy for specified transactions of the taxpayer over a given period of time. APAs may be unilateral (involving the tax authority of one country) or
bilateral / multilateral (involving tax authorities of two or more countries).
In November 2007, the Director General of Income Tax, International Taxation organised a discussion in New Delhi, where representatives from the Big Four public accounting firms in India were invited to share their APA experiences with the Indian tax authorities.
The tax authorities had requested feedback from the transfer pricing practitioners on several aspects such as the need for APA mechanism in India; the level of expertise required of tax regulators; database requirements; the feasibility of an APA mechanism under the Indian direct tax regime; APA procedures, team organisation and effectiveness of APA programmes in other countries; and suggestions for an APA mechanism suitable to Indian conditions.
An APA is beneficial both to taxpayers as well as the tax authorities. It reduces the taxpayers burden of compliance by providing greater certainty over transfer pricing methods, and eliminating the risk of transfer pricing audit over the APA term (provided the conditions of the APA are met annually). In turn, the Government obtains greater certainty in its tax collections as well as greater administrative efficacy, both of which are important as inter-company transactions and transfer pricing in India become increasingly complex. Potential transfer pricing issues are thus resolved in a spirit of mutual agreement and cooperation rather than the adversarial audit environment.
Several key practical and procedural aspects have to be considered while designing an APA programme for India:
Clearly defined goals and responsibilities for the APA programme, including a strong legal framework incorporating the APA mechanism into domestic tax law.
Dedicated APA team, separate from examiners: A dedicated APA team that negotiates APAs as well as reviews the APA documentation submitted by the taxpayer will ensure consistency in the interpretation of the critical assumptions of the APA, and thus enhance effectiveness.
Employ the right resources (economists, accountants, legal and experts).
Procedural simplicity: ensure conclusion of APA before the proposed APA tax years come up for assessment.
Position on rollbacks: the taxpayer must have assurance that the past closed years will not be reopened for audit based on the transfer pricing agreed in the APA.
Allow APAs terms of at least three to five years, given the time, effort, and cost involved in obtaining an APA.
An approach based on strong commitment to success and building trust between the tax authorities and taxpayers.
An APA mechanism will provide taxpayers with an avenue to proactively defend their transfer pricing policies rather than doing so reactively under assessment. It is hoped that an efficient and effective APA mechanism will soon be introduced in India.
Veena Parrikar (The author is Associate Director, Tax and Regulatory Services, KPMG )