Win-win from APAs?
A primary concern is confidentiality and protection of information that a taxpayer is likely to share during an APA process.
Currently not many foreign investors have applied for pre-filing consultations. But as we near the first yeardeadline of March 31, 2013, more applications are anticipated.
Transfer pricing is a foremost source of trepidation for foreign investors. The positions taken by Indian transfer pricing authorities have led to protracted litigation. To address investors' concern and restore confidence in the system, the Government introduced Advance Pricing Agreements (APAs) in Finance Act, 2012 followed by a detailed APA scheme in August 2012.
An APA is a collaborative agreement between the taxpayer and tax authorities to determine in advance the arm's length price of an international transaction.
Imposition of a graded application fee from Rs 10 lakh to Rs 20 lakh, depending on the value of an international transaction, will screen out frivolous players from applying for an APA. Mandatory pre-filing meetings on anonymous basis to discuss the broad terms of an agreement would enable a taxpayer to examine the feasibility of applying for an APA.
Pre-filing consultations are indeed a welcome proposition and would encourage foreign companies to test the waters at the pre-filing stage rather go through protracted litigation.
APA renewal option is also available. Rollbacks are not enabled currently. It is pertinent to note that though rollbacks are not formally enabled, APAs will have a precedence value in the case of pending applications or open litigation for prior years.
APA lends certainty to tax and financial reporting, while the transfer pricing method adopted/ arms-length price mitigates the possibility of disputes and creates certainty in the financial reporting of potential tax liabilities. APA also reduces incidence of double taxation, documentation costs and litigation.
It, therefore, has plenty to offer foreign investors. However, there are several concerns too.
A primary concern is confidentiality and protection of information that a taxpayer is likely to share during an APA process. Though APA rules do not specify any firewall provisions for such data, tax authorities are assuring protection of confidential data in the taxpayer's interest.
Next, if an APA is concluded successfully for future years, then why does the current rule not provide for a rollback to the open litigation years? Such a provision can enhance the effectiveness of the overall APA regime.
In the absence of timelines for conclusion of an APA, Indian authorities are committed to time-bound the process for unilateral APAs; however, the authorities cannot control the timelines for bilateral or multilateral APAs.
Like every new tax scheme, the Indian APA scheme was met with some initial apprehensions. A foreign investor definitely sees this as an opportunity for business, tax and financial certainty. Currently, not many foreign investors have applied for pre-filing consultation but as we approach the first yearend deadline — March 31 — more applications are anticipated. The initial set of pre-filings is taking place efficiently; however, a foreign investor expects more certainty on basic concerns raised at the pre-filing stage than broad-based conclusions. The increasing number of applications proves that investors have confidence in the Indian APA system and want the first-mover benefit.
The APA authorities have so far shown a positive approach in understanding investors' concerns, attempting to share FAQs, conducting public discussions and assuring fair treatment to achieve a mutually agreeable position for Revenue and taxpayer.
Time will tell if the Indian APA rules match global best practices, strengthen foreign investor confidence and create a success story in the transfer pricing regime.
(Karishma R.P. is Partner and Practice leader, Transfer Pricing Services and Shefali Shah is Manager, Grant Thornton India LLP)
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