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What to expect from US and India competent authority discussions
In this episode of the EY Transfer Pricing Roundup, podcast host Ameet Kapoor discusses the latest transfer pricing and competent authority updates in India.
Throughout this episode, Ameet Kapoor, Partner, International Tax and Transaction Services - Transfer Pricing, Ernst & Young LLP; and Anuj Khorana, Partner, Transfer Pricing, Ernst & Young LLP (India) discuss the impacts of recent transfer pricing developments in India on US and India competent authority negotiations. This episode also examines what taxpayers can expect with respect to unilateral and bilateral Advance Pricing Agreement negotiations and potential strategies to manage the agreement process.
Key takeaways:
Address recent developments in transfer pricing legislation in India
Provide an understanding on US and India Competent Authority discussions
Presenters:
Ameet Kapoor, Partner, International Tax and Transaction Services - Transfer Pricing, Ernst & Young LLP
Anuj Khorana, Partner, Transfer Pricing, Ernst & Young LLP
For your convenience, full text transcript of this podcast is also available.
Ameet Kapoor
Hi. Welcome to the first EY US podcast for All Things Transfer Pricing Controversy, where in each episode we will discuss global transfer pricing audio trends along with guest speakers from around the world speaking about all things transfer pricing in their respective countries.
We will also update on the use of alternative dispute resolution such as advanced pricing agreements and mutual agreement procedures for what we call short APAs and maps.
And what can taxpayers do in various countries to mitigate their transfer pricing, audit risk and the potential for double taxation?
So, for this inaugural episode, we will discuss a country known as a hotbed for transfer pricing audits and controversy, which is India. Our special guest today is Anuj Khorana, a transfer pricing partner based in New Delhi, India.
Anuj, over the last 20 years has worked with multinational clients from all over the globe, having Indian operations on various transfer pricing matters, including documentation, litigation maps and APAs.
And what's interesting is the Anuj also represented the company that had their very first APA ever executed in India, as well as the first ever U.S. India bilateral APA.
With this, we now say hello to Anuj Khorana. Anuj, thanks for being here and being the very first guest on EY's TP Controversy podcast.
Anuj Khorana
Thanks, Ameet, My pleasure. Thanks for having me.
Kapoor
So, let's dive right into India transfer pricing Anuj. Appreciate If you can give the listeners a brief overview of transfer pricing in India and how it's evolved over the years to its present state, including, the APA program, which I think is in its 10th year or so. Let's dive right into it. Anuj.
Khorana
Okay, thanks the Indian TP regulations were introduced in 2001, but it's been a couple of decades now. The India transfer pricing regulations, largely based on the OECD transfer pricing guidelines with some unique features like the arithmetic mean versus the interquartile range, which is typically there in most of the developed jurisdictions.
Kapoor
Right.
But India had another arithmetic mean and a plus -5% range around it. To start with, to test the margins of comparables in the tested party. There have been significant changes over the last couple of decades, most important being the introduction of the Advanced Pricing Agreement Program in India, which was done in 2012. The first TP audits happened somewhere around 2003-2004 timeframe.
And incidentally, I was handling the very first couple of transmitting orders that were concluded. And at that time the focus largely by the TP officers were trying to find the right comparables. Since then, the audit process has evolved significantly over the years, and the focus has been largely now around aspects like the value creation, intensity of functions, specifically in case of service organizations. There are a lot of companies, a lot of MNCs having large back offices and software development centers in India.
And the focus of TP audits for most of these companies have been around value creation. And where does India fall in the overall value chain? Interestingly, for companies that have transactions on account of royalties, trademark and HQ cost charges, there has been a lot of debate around the benefits test, which means do these companies in India even need the trademark or technology or the services for which the HQ cost charges are coming into India?
So, there's been a lot of debate going on, on all these issues over the years.
Kapoor
So, what are you seeing as far as adjustments to cost base in more recent times?
Khorana
Along with the issues that I spoke about, which is more around value addition, there's been also focus on issues like appropriateness of the cost base, the skill set of the people, the educational qualification of the people who are performing the activities and the experience.
The audits have become more information intensive over the years, I would say.
Kapoor
Thanks for all that. That was pretty informative. And you mentioned the APA program and I think it's been pretty successful so far; An APA is used by taxpayers around the world as well, obviously here in India. And to mitigate the transfer pricing controversy and any double tax, however APAs can take a while right. From filing to execution. That's usually one of the complaints from our clients, that these take too long. And recently we've even seen reports in the media about the backlog in India of several hundred APAs as we're here on the ground, what's happening now live in India to reduce APA processing time. And the reason I ask this is because some of the competent authority officers around the world, including the U.S. APMA office, they're saying that they're aiming to conclude position papers within 18 months of receiving an APA submission.
Khorana
Thanks, Ameet. The India litigation process can be very painful given the number of years it takes to resolve transfer pricing controversy. You know, it may take anywhere between seven to 10 to 12 years. And once the taxpayer faces adjustment, it's highly likely that the adjustments will continue for the next two years as well, because by the time the first year of adjustment comes up for the appeal hearings, the next year is already a full audit.
Kapoor
Right.
Khorana
Given the long litigation cycle, there are four steps in. The litigation process typically takes a long time. We briefly touched upon the introduction of the APA program in 2012, and I would say it is one of the most important initiatives taken by the Indian government towards a tax friendly environment that is to give tax certainty to the taxpayers.
Kapoor
How many APAs have been concluded roughly in India since 2012?
Khorana
The number is around 450 at the moment and increasing by the day because there's been a lot of focus on closure of APAs the last couple of years and COVID. But if we were to get deeper into the statistics over the last ten years, India has concluded over 450 APAs as I said. And if you were to take out two years of COVID, I think the achievement is pretty strong in that sense.
Kapoor
But I'm sure you would have read there was an article that came out that there's I don't know the exact number, but it's somebody will say, could it be like 600 or 700, What needs to be done to get the process to move faster?
Khorana
The way the APA machinery is set up in India, we have four APA commissioners spread across three cities in India and each APA commissioner has a 3-to-4-member team.
While the tenure of the APA commission is typically three years, we have seen that the team members, you know, there's a lot of rotation out and its very frequently people come and go and I think that creates a bit of a challenge for the taxpayer because APA is a slightly longer process or the APA team has to get into the details. And once you reach a particular level, if there's an officer going out and new person coming in, so there's a time lag in that. But what I hear certainly is that there's a lot of focus now from the government side to increase the headcount in the APA machinery. So hopefully we'll have more people and stability in the APA machinery which will be able to reduce the backlog. So, there'll be faster closures in the near future.
Kapoor
Oh, great. That'd be nice if we can get that. And then what about a bilateral APAs in particular?
Khorana
So, when the APA programs started, the focus of the taxpayers was to get into the program and most of the applications that we saw initially were unilateral. But soon the taxpayers realized that perhaps the bilateral APA is the way to go because that gives certainty to the taxpayer in both the jurisdictions, you know, transacting jurisdictions.
And certainly, in the last few years, we see more and more bilateral applications coming in as compared to unilateral APAs.
Kapoor
Definitely unilateral. You're only getting a one-sided answer, right? So, what about any updates you're seeing with the U.S.? I think that's probably the largest inventory of bilateral APAs in India.
Khorana
That's right. So, India has done bilateral APA with several countries, UK, U.S., Netherlands, Japan, Singapore, so forth. So, the number of cases with the US is the highest. Perhaps what India and the US comp authority could work on is, because most of the cases are service companies, the applicants or service companies so both the authorities can actually work together to categorize these companies into buckets, basis, similarity in functions and then decided on the market. So that will ease on clearing backlog, and the closure process could be really faster.
Kapoor
Yeah, they should streamline the process for sure. Let's hope that the government can add more resources to the program here, the Indian APA program, and get multinationals doing business in India certainly a bit sooner. Well, before we log off and end this episode Anuj, closing remarks in a couple of minutes, what do you see happening in the future in India with transfer pricing audits and the APA program can evolve?
Khorana
So, in my view, the audits would continue to be aggressive, and we would see larger adjustments because the size of the transactions is increasing. You know, most multinationals having business in India, they are expanding their presence with not only wanting to capitalize on the talent pool in India.
Kapoor
Right.
Khorana
But also looking at the India domestic market as an opportunity for them. And therefore, I believe the right move for companies or taxpayers operating in India to do is to go for the APAs, I think APAs are the way to go in order to avoid spending energies on litigation and rather focus on their core business.
Kapoor
Thank you for that, Anuj.
Thanks for your insights today on this episode. I want to thank you, the audience, for listening and participating.
Goodbye for now and hope you join us for our next EY TP Controversy podcast. Thank you.
