cutting through complexity / India's New Advance Pricing Agreement (APA) Program Presenter r Alpana Saksena International Tax Conference Mumbai Dec 7, 2012
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BYKPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (I) A VOIDING PENALTIES THA T MAY BE IMPOSED ON ANY TAXPAYER OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. 5 2012 KPMG, an Indian Partnership
India - Traditional Dispute resolution - An Overview Level of authority / Court Transfer Pricing audit 4 years from date of filing return Often repetitive additions DRP/1 st Appeal (Commissioner (Appeals) 9 months to 3 years Final authority on factual issues 2 nd Appeal Income tax Appellate Tribunal 2-3 years Only substantial questions of law 3 rd Appeal High Court 5 years Final Appeal Supreme Court 5 years Domestic litigation - Total time 15 years + 5 2012 KPMG, an Indian Partnership
APA Program in India Legislative Provisions and Procedure (Announced in Budget of March 2012)
APA Program - Basic Legislative Provisions Sections 92CC to 92CD of Income Tax Act 1961 f independent member firms affiliated with KPMG
APA Rules - Operating Guidelines (Announced 30th Aug 2012) APAs can be unilateral as well as bilateral / multilateral Transactions to be covered existing transactions (application to be filed by March 31 for transactions beginning 1 st April) new international transactions (application can be filed before undertaking transactions) Pre-filing consultation mandatory - specified format (anonymous option available) Specified format for APA application - withdrawal / renewal of APA possible Schedule of APA fees Particulars Transaction value up to INR 1 bn (approx USD 20 mn) Transaction value up to INR 2 bn (approx USD 40 mn); Transaction value above INR 2 bn (approx USD 40 mn) Fees INR 1 million (approx USD 20,000) INR 1.5 million (approx USD 30,000) INR 2 million (approx USD 40,000) APA teams to include panel of specialists such as economists, statisticians, etc Annual compliance report required, compliance audit would follow. Rules 10F to 10T of the Income Tax Rules 1962 5 2012 KPMG, an Indian Partnership ;
APA process Mandatory Pre-filing Consultation i Unilateral APA BAPA MAPA I Application DGIT Indian CA Other CA Applications checked for deficiency opportunity to correct available MAP Arrangement APA Team including independent experts Hearings, info requests, site visits Mutually agreed draft APA to be prepared i Final APA 5 2012 KPMG, an Indian Partnership
APA Process - A quick overview Application for pre-filing consultation Key milestones Pre-filing Concluding pre-filing consultation Formal APA application lodged Post-prefiling Phase Concluding APA Pre-filing > Consultation (Form 3CEC) Pre-filing Process and Outcome The APA Application (Form 3CED) Negotiation & Settlement Annual Compliance (Form 3CEF) Key details Prescribed format requires details of: Covered transactions, Functions, assets, risks Proposed benchmarking methodology, PLI, Comparables Critical assumptions Past audit history APA team holds consultations to Explore suitability of APA identify issues for detailed discussion Discuss scope of covered transactions Are non binding Outcome will be conveyed in writing Detailed application developing information provided at prefiling stage Forecasts estimates required Submission reviewed by APA Team Site visits, discussions, joint meetings to gain a better understanding After review, analysis & evaluation stage, positions of the APA team is discussed and agreed with the taxpayer APA signed Taxpayer to file a YOY compliance report with to demonstrate compliance with APA terms TPO to conduct compliance audit, to verify compliance with APA terms TPO to submit audit report to DGIT within 6 months affiliated with KPMG
Mandatory Prefiling - The gateway to APA Why Advantageous? Affords an opportunity to test waters, gauge receptivity of revenue Identify issues that will require specific development help taxpayer decide whether APA can be achieved fees for prefiling Anonymous Advantageous to taxpayers with difficult dispute history of anonymity could help in frank discussions Preparation required Requires similar preparation as for TP Audit report Structured format gives clarity in respect of information required Advantageous even if APA not pursued Pre-filing could be instructive Could provide valuable insights into strength and weakness of APA proposal and business strategies and models Assist in being better prepared for TP audit 5 2012 KPMG, an Indian Partnership 11
Typical Transactions for APAs India specific transactions suitable for APAs Software development & ITES services Management services and royalty pay outs Contract R&D (Pharma / Software) Contract manufacturing Intercompany loans, advances and guarantees Distributors and marketing intangibles Start up companies with losses Any new transactions - no dispute history ^2012 KPMG, sn Inclisn Psrtnsrship snd 3 rnsrnbsrfirrn ofths Kl 12
Are you ready for an APA? Options to pursue? Nature of transactions Cost benefit Analysis versus outcome Looking for certainty? Transactions critical to business In perpetual dispute and litigation New transaction - possibility of dispute Losses / contentious audit triggers Time / expense/ resources vs size of transactions Transactions too small and simple [ No disputes with tax authorities Outcome of audit vs APA would be similar Regardless of nature of transactions Tax authorities habitually aggressive Litigation processes lengthy / outcomes uncertain Goal is to manage potential controversy Probably Yes Probably Yes When unilateral When the dispute is primarily in India If relationships between CAs strained If APA program new in country of operation Other cases Bilateral When bilateral Transactions are interdependent Where the anticipated outcome in India may be different and therefore needs to be agreed upon with overseas CA When possibility of economic double taxation exists 5 2012 KPMG, an Indian Partnership 13
Possible Pros & Cons of an APA Anonymous pre-filing consultation has specific advantages APA gives Certainty for 5 years -prospect of renewal for 5 more years simpler compliances after APA has been entered into Reduces documentation burden Time and cost saving Preferred by tax authorities Possible persuasive value in litigation and open audit years. Modest upfront cost No time limit prescribed under the APA rules Detailed information required in pre-filing /for APA application No rollback provisions Bilateral APAs dependant on relationship with treaty partner 5 2012 KPMG, an Indian Partnership 14
Indian Revenue- Positive Perspective on APA Program APA program based on International Best Practices Revenue APA team has been proactive and positive in its approach The key perspectives of the APA team are : To reduce litigation and provide certainty Early filings - could leading to possible first mover advantage/ quick resolution Negotiation with open mind in collaborative environment Adverse audit history - not to impact negotiations APA proposal to be looked at from a fresh perspective Not bound by past history Attempt to reconcile differences /contentious positions Open to mutually agreeable solutions Changed attitude reflected in composition of APA teams, specialists included in teams "We agree that implementation will be the key and I can assure you that the Indian tax administration is keen to make this APA program a huge success." DGIT, Mrs. Promila Bhardwaj during the first ever webinar initiated by KPMG in September 2012 5 2012 KPMG, an Indian Partnership 15
APA - Regulatory Set-up in India Chairman CBDT Dr. Poonam Kishore Saxena I DGITMntlTax) Promila Bhordwoj Commissioner APA Kamlesh Varshney Competent Authority Sanjay Kumar Mishra Mumbai Bengaluru MM Director APA Batsala Jha Yadav Addl. Joint Deputy Commr Commr Commr (APA) (APA) (APA) Manoj Sobhan S.K. Pandey Kar Chatterjee UNILATERAL Asst. Commr (APA) Neha Chaudhary Addl. Comm. (APA) Vikram Batra Deputy Commr (APA) Dileep Kumar Joint Commr (APA) Satya Sai Rath Deputy Commr (APA) Kiran Katta Under Secretary APA-I Ashish Helewal Under Secretary APA-II Mirnalini Kaur Sapra BILA TERAL/ MULTILA TERAL 5 2012 KPMG, an Indian Partnership 16
Abbreviations APA - Advance Pricing Agreement ALP - Arm's Length Price AEs - Associated Enterprises Board / CBDT - Central Board of Direct Taxes BAPA - Bilateral APA CIT - Commissioner of Income Tax MAP - Mutual Agreement Procedure MAPA-Multilateral APA TP - Transfer Pricing TPO - Transfer Pricing Officer PLI - Profit Level Indicator USD - United States Dollar CT - Covered Transactions CA - Competent Authority DGIT- Director General Income-tax (International Tax) DTAA - Double Taxation Avoidance Agreement FAR - Functions, Assets and Risks Analysis ^2012 KPMG, sn Inclisn Psrtnsrship snd 3 rnsrnbsrfirrn ofths Kl 17
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