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Welcoming APA to supplement transfer pricing rules

India
If India was ahead of its time in legislating Transfer Pricing (TP) regulations, it has finally, albeit belatedly, signed off to give effect to FM Mukherjee's last budget proposal which legislated Advance Pricing Agreement (APA).

India now joins the global bandwagon of maturing TP regimes for managing cross- border disputes through means other than litigation. This marks a paradigm shift in the scheme of a decade-old law, which has become severely criticised and earned India recognition as amongst the most aggressive jurisdictions.

Simply stated, APA provides an avenue for tax payers (with cross-border transactions) to agree on a price, method or assumption. Globally, the APA regime has been effectively used as a toll for horizontal monitoring where the tax administration and large tax payers come to an understanding on an arm's length price in advance of implementing the transaction.

While there are a few features in the guidance, which have a 'Desi (Indian) touch', global tax directors should generally feel at ease with the APA regime. Guidelines are broad-based; picking a lot from international practices.

Availability of bilateral and multilateral (as opposed to only unilateral) APAs, which entail an agreement with overseas tax administration, will go a long way in building confidence. Through bilateral APAs, tax payers will avail of certainty at both ends of the transactions, though, India will have to evolve a robust framework for issuing multilateral APAs as it has a limited experience in dealing with triangular treaty (where more than one overseas jurisdiction is involved) cases.

Some surprises & misses

A pleasant surprise is inclusion of economists, lawyers and other experts in the composition of the APA team given that the authority would have to deal with business issues. Further, its applicability is not limited to determination of an arm's length price, but also includes TP methodology, critical assumptions etc. addressing issues which have been controversial. The option of pre-filing consultation is a welcome & positive step though it could have been a less elaborate procedure. The pre-filing procedure besides being formal is broad-based and steals away the thunder of 'testing the waters' and an important step in confidence building.

Reading the fine print, I see some show stoppers hindering its successful implementation. For instance, no time frame has been prescribed for coming completing APA. This could be a dampener and make the exercise not worth the effort - I would have expected at least a statement to the effect that the APA authority would endeavor to come to a consensus on Transfer Price.

The entire scheme of APA's works around the concept of 'critical assumption', definition of which is vague and ambiguous.

However, to be fair, I feel some of the aspects are fact-based and difficult to capture in the realm of definitions or rules. It is therefore critical that the tax administration shows flexibility in implementation. On user charges, an APA aspirant will have to fork out up to 2 Million Rupees on a significant transaction towards APA fees. Though, I don't see that as a barrier, it will certainly ward-off non-serious players from applying.

Annual compliance replaces assessment

As a part of the scheme, post-obtaining an APA, tax payers are required to furnish an annual compliance report to the administration, which is like a 'check & balance' to ensure that all conditions are complied with.

However, necessity for the Revenue to perform a compliance audit each year seems a meaningless exercise and sounds like repetition of the assessment procedure.

Empowerment of officer and scope of the review to perform an audit, seek information etc. is too wide. This could have been kept simple and more in the nature of self-compliance. Alternatively, a selective process of monitoring compliance should have been kept within the scope of APA team instead of it being delegated to the field officer. The rules worry me on the rights of the APA team to visit the applicants' premises; make enquires etc. and sounds similar to the powers conferred on field officers for assessments.

Enhanced safeguards expected

I couldn't see any safeguard from adverse assessments in the intervening period when APA negations are underway given that it could take 2-4 years for agreement.

Further, APA applicants will expect an assurance that the information submitted during the process will be treated as confidential weather the negations succeed or fail. Confidential business information would be shared in the process and it is critical that 'Chinese wall' be maintained between the APA team and the tax administration.

Besides, CBDT has assumed wide powers to amend the APA's including right to cancel it even in situations where the law is amended retrospectively. This clause crosses all limits and I wonder if APA can't give certainty and hedge from the menace of retrospective laws, why would any tax payer walk the APA path? Further, even if for the sake of argument one assumes that the administration wants to retain a right to amend APA, how will it work in the context of bilateral and multilateral APAs? Just like a tax treaty cannot be amended unilaterally, a bilateral and multilateral APA in my view cannot be altered without a mutual understanding with the foreign government as they are a party to such an agreement. This runs contrary to generally accepted international protocols.

The procedure for renew of APA is tedious and appears like going over the entire process contrary to international conventions. Further, a 'roll back' process would have enabled the government to settle past disputes and is common in many countries.

APA has proved to be an effective tool to curb litigation, build confidence and enabling governments to protect their tax base. Its introduction is just a starting point and the test would lie in achieving success jointly for the tax payer and government. Despite my reservations, I congratulate the efforts.

The author is Chairman of BMR Legal and was assisted by Sanjiv Malhotra. Views are entirely personal.

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010
E. mukesh.butani@bmradvisors.com

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First published in the Business Standard, 31 August 2012

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