The Financial Express
Partner, International Tax Services
Transfer pricing (TP) has emerged as the pre-eminent international taxation issue worldwide, including in India. Advance means of agreement on TP issues has become a critical element. This is plainly illustrated by the willingness of even the most recalcitrant countries to embrace the adoption of advanced pricing agreements (APAs) and similar programmes. Interestingly, the United Nations had suggested that developing countries not adapt APA programmes as they begin to implement TP regimes. This is largely due to the perception that their tax authorities lack the experience to deal with such issues.
The legal framework that has evolved to deal with TP matters is the same throughout the world. The OECD guidelines on TPs are demonstrative of the experience of its members over many years. The parameters of the applicable law in most countries and procedures are consistent with the OECD guidelines. Globally, TP disputes are the principal subject of international tax controversies. Why should a contentious dispute arise if the underlying law is essentially the same in all countries? The answer is that TP issues are factual in nature and often applied differently in each country. The appropriate resolution of an issue in one situation may be different from the same issue’s resolution for another taxpayer in the same business.
The concept of the APA is to provide a means by which taxpayers and tax administrations can voluntarily agree on TP issues. This process may be bilateral in nature and include the tax administration of other countries in which the taxpayer and its associated enterprises have transactions (provided a treaty relationship exists between the countries). This way, a range of issues can be resolved. The advance dispute-resolution mechanism is beneficial to both taxpayers and tax administrations because complex factual issues can be resolved, forestalling the time-consuming and expensive process of a comprehensive tax examination that can involve controversy, litigation, appeals, etc. In theory, the time and expense on both sides over the years should be significantly reduced through such procedures.
The Indian APA programme is expected to provide an opportunity to resolve TP issues in advance. Ever since the launch of the programme in 2012, there has been an enthusiastic response from taxpayers. The uncertain and unpredictable domestic tax law litigation process makes the APA programme an attractive option for managing TP controversy.
While Indian APA rules provide for bilateral APAs, the trend has largely been towards seeking unilateral APAs, which may, however, present significant problems for both tax administrations and taxpayers. From the point of view of another tax administration, problems arise because the other tax administration may disagree with the APA’s conclusions. An incentive for some taxpayers seeking APAs is the prospect of a roll-back of an earlier result from the open tax years. A roll-back may provide a cost-effective way to resolve an ongoing TP dispute. The absence of roll-back provisions in the Indian APA rules has been stated as a concern by taxpayers.
With a high level of interest in the APA programme, a question that is often raised is whether Indian APA has adequate resources and staff to deal with the applications expeditiously. While launching the APA programme, it was indicated that the team would endeavour to conclude APAs within timelines that are consistent with international practices. A broad survey of time-frames typically taken for conclusion of APA indicate that the same could range anywhere between 12-18 months for unilateral APAs and 20-48 months for bilateral ones. For example, a recent report on APAs by the US mentions that the country has taken an average of 34 months for concluding a new unilateral APA and 41 months for a new bilateral APA (even though the timelines may be shorter for an APA renewal). The statistics released by the UK authorities indicate an average of 26 months, even though nearly 50% of the APAs are concluded within 15 months. The recent reports that India has concluded five unilateral APAs within 12 months after the last date of filing an APA application for the FY13 is, therefore, commendable.
An APA programme may initially put a strain on resources, because tax administrations must divert resources earmarked for other purposes. Demands may be made on a tax administration’s resources by taxpayers seeking the earliest possible conclusion to an APA request, keeping in mind their business objectives and the timelines they function with. In addition, the APA programme will be led by the demands of the business community. These demands may not coincide with the tax administration’s resource planning, thus making it difficult to process both APAs and other work efficiently. The Indian tax administration should consider adequately resourcing the APA programme to address these issues.
Another potential disadvantage could occur as there may be a tendency to harmonise the basis for concluding later APAs in a manner similar to the ones concluded earlier without sufficiently regarding taxpayer-specific facts and circumstances. Care should be taken when the results of previously-concluded APAs are interpreted as being representative, across all taxpayers.
The Indian APA office is looking at creating an atmosphere that encourages taxpayers to come to the table to find a mutually satisfactory resolution to difficult TP issues.
Views are personal.