India advance pricing agreements. Way to go

Transcription

1 India advance pricing agreements Way to go

2 The Indian Revenue Authority views transfer pricing as a major tool to raise tax revenue. Over the past few years, the number of TP audits has increased and aggressive positions have been adopted by the Indian Revenue, which has contributed to long drawn and protracted litigation. While Courts have provided guidance on some contentious issues, TP continues to dominate the tax litigation scenario for MNCs in India. In the ten rounds (based on each tax year) of TP audits so far, the cumulative value of TP adjustments according to government reports was around INR2,700 billion (approx. US$45 billion) till FY 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. APA roll back option is also available, subject to certain conditions. The APA program is designed to avoid the confrontation inherent in an examination or an audit and foster more effective communication between taxpayers and the Indian Revenue Authority, by helping both the parties to focus on relevant facts and circumstances in advance. As multinational corporations grapple with the effects of OECD s BEPS project, as well as domestic legislative changes, transfer pricing is becoming increasingly challenging. EY s Global Transfer Pricing Survey 2013 indicates a clear shift toward prioritizing risk management in TP, with increased concerns regarding controversy and double taxation. 47% of parent companies reported that they have experienced double taxation as a result of a transfer pricing adjustment. EY s 2014 Global Transfer Pricing Tax Authority Survey highlights the fact that TP will continue to be front of mind for both tax authorities and multinationals. A pre-emptive approach through APAs to managing global transfer pricing disputes can enhance both efficiency and effectiveness. Many countries are therefore, adopting APA programs to address evolving TP issues worldwide. In this ever evolving TP controversy s dynamic environment, the Indian APA program has been perceived as a Sign of Relief for MNCs to bring tax certainty in their business. The APA regime in a Snap Shot: The Government of India amended the Income Tax Act 1961 to enable an APA between taxpayers and the Central Board of Direct Taxes (CBDT). The APA Rules provide detailed guidelines on the process along with information, data, fee details, forms that need to be filed, etc. A taxpayer may first undertake pre-filing consultations, which may be done on an anonymous basis, prior to filing a formal APA application. The taxpayer s associated enterprise (AE) may initiate an APA process with the Competent Authority in the other country in case of a bilateral/multilateral APA. Where APA exists, the regular audit of covered transactions will not be undertaken by the Indian Revenue Authority. The APA may be cancelled or revised in certain circumstances by the Indian Revenue Authority or at the request of the taxpayer. In case of renewal of an APA beyond its tenure, the procedure for a fresh APA application will be followed. Rollback an icing on the cake: The recently notified APA Rollback rules also provide an option to the taxpayer to roll back the APA for prior four years to the same international transaction, subject to certain conditions. The taxpayer is required to file an Annual Compliance Report (ACR) during the applicability of the APA. ACR may be subject to scrutiny by the Indian Revenue Authority. 2 Companies Act 2 India advance pricing agreements

3 APA process - An overview: Pre-filing APA request Evaluation and negotiation agreement Execution and monitoring Strategy development Unilateral v. bilateral Rollback evaluation Optional pre-filing meeting (anonymous permitted) Business overview and proposed international transaction Industry overview Supply chain overview FAR analysis Economic analysis Proposed terms Processing of application Field work (meetings, sitevisits) Further documents and information Government-togovernment process Critical assumptions Drafting and concluding APAs Annual compliance report, record-keeping Compliance audit Revision or cancellation Renewal As the APA process moves forward, interaction is expected to evolve from a general discussion of taxpayer s industries and businesses to more specific in relation to the transactions and finally to drafting and administering agreement. Unilateral/Bilateral/Multilateral APAs The Indian APA program provides for unilateral, bilateral and multilateral APAs. Unilateral APAs with the Indian Revenue will protect from India-initiated adjustments (however, it will not safeguard from foreign-initiated adjustments to the other associated enterprise). If an intercompany transaction spans two or more countries under the applicable income tax treaties, the bilateral/multilateral APA creates efficiency by involving the relevant Competent Authorities in negotiations from the outset and securing an improved protection. Taxpayers also have the option to convert unilateral APA applications into bilateral before they are agreed or concluded. Some areas of prolific transfer pricing disputes where APA is likely to be useful Captive intra-group services Agency services or commission agents Procurement services and sales support services Limited risk distributors Payments for use in intellectual property Business restructuring transactions Allocation of headquarter and management fee Financial transactions such as loans and guarantees Sales supply chain structures Low margin companies with significant inter-company transactions Contract manufacturing Commodity trading Why APA Likely benefits: Certainty of tax treatment: This is the most important benefit to the taxpayer. Given the recent APA experience, the approach of APA Authorities and promising prospects, it makes absolute sense for evaluation of an APA. This is especially required in cases where companies face the pain of recurrent TP adjustments, or the size and/ or complexity of new or proposed transactions warrants certainty of treatment, and where the pros and cons of an APA outweigh those of other dispute resolution mechanisms. This may translate into freedom from adjustments and double taxation for the period covered under the APA. Time and cost savings: An APA typically gets resolved or agreed in one to two years and could provide protection for up to five years (nine years in case of roll back), and will be renewed after the period providing time and cost savings as compared to protracted domestic litigation which could take as much as years to reach the final verdict by the Apex court, onerous compliance documents and rigorous TP audits. India advance pricing agreements 3

4 TP controversy is here to stay: TP controversy in India is not going away. With a tight fiscal deficit target, the Indian Revenue (tax inspectors or field officers) will continue to exert pressure and engage in more strict TP audits leading to ever increasing litigation. While there is a positive trend in the outcome of litigation, the fact that it is long drawn and repeating year-on-year makes the domestic appeal process unattractive in the long run. In such a scenario, the APA program is a refreshing and positive change, which heralds an exemplar shift in India s tax policy initiatives on the global platform. India APA Statistics and experience so far: Filed in FY Unilateral APA Applications Bilateral APA Applications Total Signed NA NA NA 32 (till date) According to news reports 2, the 41 APAs signed (including three bilateral APAs with Japan and United Kingdom) relate to various sectors such as investment advisory services, software development services and IT-enabled services, etc. In addition, a considerable number of APAs are under process and nearing conclusion. Furthermore, with US IRS and the Indian Competent Authorities agreeing on a framework to resolve MAP cases and accept applications for a bilateral APA with India, many US taxpayers are considering to convert their unilateral APA into bilateral. The APA office has been actively moving the inventory of cases and has already prepared position papers in several cases and is proactively discussing outstanding issues with taxpayers. Considering, the success of the APA program as evident from the number of applications filed and the manpower constraints in the APA office, the Finance Minister also proposed to strengthen the administrative set up of APA to expedite disposal of applications. While aggressive TP audits and protracted litigation seems to be the trigger for the large influx of APA filings, gaining certainty on transactions, positive disposition, and non-intrusive approach of the APA office seems to be the biggest attraction as to why taxpayers are seeking APAs. The overall experience with APA authorities has been very reassuring for taxpayers and the response has been equally fervent. The APA team has been cooperative, responsive, and importantly, the overall attitude is non-adversarial and solution/resolution oriented. Discussions and meetings (including site visits) with taxpayers are performed with an open mind with no apprehensions. Significantly boosting the faith of the taxpayers is the willingness to evaluate and adopt different positions than what has been done in past TP audits. 1 Annual report of Ministry of Finance As per CBDT press release dated 01 February Companies Act 4 India advance pricing agreements

5 Why EY where experience matters, EY is the front-runner! To help businesses tackle these challenges, EY has assembled a strong global network of prominent transfer pricing professionals, including many who have served in senior roles with revenue authorities around the globe. In the current environment, it is essential to take a proactive approach to address controversy by building productive relationships with tax administrators. When pursuing an APA, substantive transfer pricing knowledge is simply not enough. Advice from experienced APA professionals is likely to make a substantial difference at all stages of the APA process. EY s global network of seasoned transfer pricing professionals could help taxpayers work more effectively with tax administrators around the world. EY s global network of TP professionals Our global network of transfer pricing advisors The India transfer pricing team transfer pricing professionals spanning 125 countries More than 425 transfer pricing professionals across the country 400+ people in 11 countries in the Americas 270+ people in 13 countries in Asia Pacific 270+ people in 26 countries in Europe, the Middle East, Africa 100+ transfer pricing partners, principals and directors globally The Transfer Pricing team consists of people from diverse academic and professional backgrounds such as accountants, economists, management graduates and lawyers More than 80 transfer pricing partners, associate directors, senior managers and managers Capabilities across a wide range of industries and sectors such as automotive, software and information technology, media and entertainment, telecommunication, pharmaceuticals and life sciences, retail, consumer goods, industrial goods, defense, agriculture and commodities, general trading, and infrastructure and real estate How our unmatched tax controversy strengths can help you win with the APA Authority We will blend our Indian Transfer Pricing litigation strengths with our Global Virtual APA Team to bring together some of the best people who could help you secure the most favorable conclusion with the APA Authority. This blend would ensure that the vast experience of our Indian litigation experts can be combined with the knowledge bank and experience of our global APA team to get the most optimum results for you. Our global virtual APA team members are a floating group who could be available at various locations depending upon requirements and help you negotiate with Competent Authorities of various countries. This team of professionals will be supported by the local client serving team of executives with several years of transfer pricing experience both in the Indian and international transfer pricing practices. If you are considering an APA, EY s experienced team of transfer pricing professionals in India, with the support of its global network, will be more than willing to help you make informed, practical decisions. It could also help with the economic analysis and represent you in negotiations with tax authorities. Contact your local EY representative for more information on how we can help. India advance pricing agreements 5

6 Overview of EY TP services: Determining global policy and implementation assistance Impact analysis of OECD BEPS developments Business Restructuring Evaluation of alternative business structures/ models Representation before tax and appellate authorities Controversy Management and resolution Monitoring, and risk management Global Transfer Pricing BEPS Strategy, design and planning Intercompany effectiveness solutions Assistance in APA and competent authority negotiations Compliances Study, documentation, and reporting Supply chain tax optimization 6 Companies Act 6 India advance pricing agreements

7 Indian TP contacts Delhi Vijay Iyer Anuj Khorana Ameet Kapoor Kochi Rajendra Nayak rajendra.nayak@in.ey.com Bengaluru Rajendra Nayak rajendra.nayak@in.ey.com Mumbai Hitesh Sharma Hitesh.Sharma@in.ey.com Hyderabad Jayesh Sanghvi jayesh.sanghvi@in.ey.com Pune Chetan Rajput chetan.rajput@in.ey.com Chandigarh Vijay Iyer vijay.iyer@in.ey,com Chennai Ashwin Vishwanathan ashwin.vishwanathan@in.ey.com Kolkata Nitin Jain nitin1.jain@in.ey.com Ahmedabad Dhinal Shah dhinal.shah@in.ey.com India advance pricing agreements 7

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