Current TP Litigation Scenario Alternative Resolution Mechanisms MAP & APA August 2010

Transcription

1 Current TP Litigation Scenario Alternative Resolution Mechanisms MAP & APA

2 Agenda Increasing focus on Transfer Pricing Current litigation status in India Experiences in TP Litigation Alternatives to Litigation Mutual Agreement Procedures Advance Pricing Arrangements

3 Increasing focus on Transfer Pricing Majority of the MNE believe TP absolutely critical to their organisation over next few years Increase in globalization and resultant increase in cross border inter- Company transaction Increasing likely hood of TP Audit TP Rated as most important tax issue by tax directors Increasing focus on Transfer Pricing Slide 81

4 Asia-Pacific Transfer Pricing Intensity Map India ranked # 6 on TP Week s Top Ten Toughest Tax Authorities for TP 1 Japan 2 Germany 3 United States 4 Australia 5 France 6 India 7 Korea 8 China 9 Canada 10 United Kingdom High Moderate Low None Slide 82

5 Transfer pricing litigation scenario in India Threshold for TP Audits aggregate annual value of international transactions with related parties > INR 15 crore (US$ 3.30) million approx proposal to move to risk based audits from April, 2011 Five rounds of TP audits completed in 2009 focus on IT/ BPOs [high margins location savings] increasingly more complex audits pursued More emphasis on comparables, less on fundamentals of TP Aggressive positions adopted, huge potential penalties Slide 83

6 Current litigation status in India TP Addition made in number of cases In excess of 2000 in last three round of audits Increase in amount of TP adjustments over the years (refer table below) TP Addition - Trend AY AY AY No of cases Adjusted cases Amount ( in INR Crores) Large number of cases pending at Appellate levels (DRP, CIT A, ITAT) Slide 84

7 Experiences in TP Litigation - The Indian Scenario TP in nascent stage in India Lack of trust and faith major area of concern Closely mirrors TP progression experienced by developed TP regimes Corresponding adjustments not allowed in most countries Low level of maturity High volume of cases handled per TPO Slide 85

8 Experiences in TP Litigation - Managing disputes outside India TP disputes growing worldwide More cases being litigated, but still relatively few in total Increasing interest in risk assessment, e arly engagement and real time working Prospect of joint audits and greater co-operation e.g., JITSIC Increased focus on Alternative mechanisms Slide 86

9 Alternatives to Litigation Various alternatives used across the globe for managing TP litigation Mutual Agreement Procedures Arbitration Safe harbours Advance Pricing Arrangement Dispute resolution panel (DRP) also introduced as an alternative mechanism in 2009 to reduce litigation Intent vs Implementation Slide 87

10 Mutual Agreement Procedures (MAP) Remedy available under the Double Tax Treaties Independent of remedies under domestic tax law to resolve tax disputes A process of negotiation, not litigation Covers disputes of double taxation in relation to TP adjustment, existence of PE and Attribution of profits OECD countries agreed to incorporate possibility of arbitration clause in Article 25 EU arbitration convention gaining significance pressure on Competent Authorities to resolve disputes within 2 years Slide 88

11 Mutual Agreement Procedures (MAP) Benefits Currently the only mechanism to resolve economic double tax Brings in additional perspective from the other Competent Authority Decision binding only on acceptance Can be simultaneously pursued with domestic appeals Demand stayed till dispute resolved, subject to provision of bank guarantee (US, UK and Denmark) May provide leverage in negotiating with other jurisdiction Slide 89

12 Mutual Agreement Procedures (MAP) MAP and how it is viewed outside India Growing importance of the role of the Competent Authority Many countries need to increase resources to cope with caseload Arbitration is helping to drive CA agreements MAP works best when: CAs have good experience, relationship and interpersonal skills Face to face meetings very helpful Balance of cases (inbound and outbound) greatly affects CA attitude In future, CAs involvement at a much earlier stage Slide 90

13 Mutual Agreement Procedures (MAP) MAP - experiences in India Batch processing of MAP applications Lack of collaborative approach Time duration for settlement Impact of MAP outcome on open / future years Admissibility of MAP application for TP adjustments where DTAA lacks article 9(2) of MC Slide 91

14 Advance Pricing Agreeements (APA) Overview Advance agreement between taxpayer and one or more national tax authorities Seeks to determine an appropriate set of criteria for computation of transfer price (including TP method to be applied, critical assumptions, etc.) Voluntary process Aims at solving potential taxation dispute in a collaborative manner Proposed term 3-5 years, unless specific reason for shorter term In certain countries, rollbacks to open tax years are allowed Slide 92

15 Advance Pricing Agreements - Benefits Can assist in audits for the open years Certainty of results / tax treatment Avoidance of potential audit risk/controversy procedures Can often be renewed easily Narrow recordkeeping obligations Rarely fail Saving of time and cost involved in litigation BAPA can reduce/eliminate double taxation risk Slide 93

16 Advance Pricing Agreements Setting it right APA introduced in the proposed DTC Initially unilateral APAs expected Practical experiences from more mature jurisdictions should be considered USA Australia United Kingdom Canada Japan Encouraging results of APA programmes in various jurisdictions Slide 94

17 Advance Pricing Arrangements APA Cases Asia Pac (up to 2008)* Japan Australia China Korea Completed In progress *Statistics for Japan only include multilateral APAs Sources: Korea: National Tax Service s 2008 APA Report, June 2008; Japan: National Tax Agency s APA Program Report 2008; Australia: Advance Pricing Arrangement Program, Update, November 2008; China: Private sources. Slide 95

18 Advance Pricing Arrangements Practical Considerations Dealing with complexity How APA works Process Change in mindset Methodology Bilateral APA link with CA Importance of pre - filing Significant change in mindset required Fact pattern Unilateral APA Setting the critical assumptions Sharing of information important Slide 96

19 Advance Pricing Arrangements - When to Consider The Bilateral Government support Canada Trademark Distributor Royalty US Parent Canada pays a 3% royalty to US Parent Canada suffered operating loss Audit History 2006/2007 audit by Canadian Revenue Authority - no tax assessed threat that royalty to US is too high Slide 97

20 Advance Pricing Arrangements - When to Consider Managing the Operating Loss US operating results 2002/2003 Operating loss Operating income 2007/2008 Operating loss Japan Parent US Purchase and distribute semiconductors Audit History 2005/2006 IRS audit of US subsidiary No adjustment but very poor relationship with field team (commented about 2002/2003 operating loss) Slide 98

21 Advance Pricing Arrangements - When to Consider The Overachiever UK Parent US Distributor US Operating Results UK Parent never considered transfer pricing and realizes it is consistently earning operating margins in the US of between 7-10%. Slide 99

22 Alternative Mechanisms which one to take MAP APA Litigation under domestic law Safe Harbour No single best alternative for all cases Consider and strategise the best approach Avoid knee jerk reaction and fire fighting Selection of mechanism to be based on facts of each individual case Slide 100

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