New Tax Laws To Watch Out For In 2013 -II Advance Pricing Agreement

Transfer Pricing: Advance Pricing Agreement’s

In the budget proposal of year 2012-13 finance minister introduced a new arrangement in the transfer pricing section to reduce the litigation and improve clarity in transfer pricing rules. The new arrangement called Advance pricing agreement (APA). As per the tax experts transfer pricing is the single-largest cause of litigation for both foreign and Indian multinational companies. APA’s are common in other developed nations. And with the issuance of APA rules vide notification dated 30.08.2012 “Advance Pricing Agreement Scheme” (Rules 10Fto 10T of Income Tax Rules) 10^th amendment. The Finance Act, 2012 had inserted sections 92CC and 92CD in the Income Tax Act 1961 introducing the provisions of Advance Pricing Agreement (APA). The APA Scheme shall come into effect from the date of its publication in the Official Gazette, i.e. from 30.08.2012

APA- Advance Pricing Agreement’s

An APA is a contract between a taxpayer and at least one tax authority specifying the pricing method that the taxpayer will apply to its related-company transactions usually for multiple years or in other words we can say that “APA is an advance agreement that sets transfer price of the covered transactions prospectively between the taxpayer and tax authorities. The taxpayer and tax authority also mutually agree on the TP method to be applied and its application for a certain period of time.” Through the APA the tax authority will spare the TP adjustments till the time taxpayer follows the agreed rules and regulations.

Benefits of APA

An APA offers multiple benefits like it often involves resolution of prior years pending cases. In some cases, APA’s can give a successful means for settle existing transfer pricing audits or adjustments. It also reduces the incidence of double taxation as well cost incurred to documentation preparation and Audit defence and an APA also offer taxpayers with a significant way to reach better assurance on acceptance of best transfer pricing method .Also the with APA’s the taxpayer can use any method for TP instead of prescribing 5 method this will provide the tax payer an opportunity to negotiate on the price front. The proposed nature of APA is such it will reduce the burden of compliance to taxpayer. These can be entered in the block of 5 year.

Type of APA

APA can be one-sided, bi-lateral or multi lateral (two sided), the bi-lateral APA are  an agreement between a taxpayer and a one tax authority where as the two-sided or multilateral APA’s are can have multiple taxpayers who are connected to each others  and  more than one tax authority, present by joint agreements between the applicable government concerned  authorities. The One-sided or unilateral agreements are not recognised by foreign tax authorities.

Rules

The government notified the rules in august vide notification dated 30^th august 2012 these rules are called 10^th amendment rules (income tax rules as amended). CBDT is the authority which notifies rules and issues circulars on behalf of government. These rules apply with immediate effect of publication in official gazette.

Rules Provide for procedure to be followed for making application and processing of application, relevant forms and   procedure to be followed, defines major terms of APA. It also contains information regarding the annual compliance report and provisions regarding cancellation and revision of APA.

It Provide that

1 application for APA can be made at any time before the first day of the previous year relevant to the first assessment year for which application is made, in respect of the transactions which are of a continuing nature and which are already occurring.

2 fee for filling of APA application from Rs. 10 lakh to 20 lakh depending upon the size of international transaction and fee is non refundable in any whatsoever case.

3 as per the rules every applicant is required to apply for pre-filing consultation

Pre filing Consultation Determines (Rule 10H)

(i)                 scope of the agreement

(ii)               identify transfer pricing issues

(iii)             determine the suitability of international transaction for the agreement

(iv)              discuss broad terms of the agreement.

And if after the consultation tax payers think that he would not go for APA then no fee is payable at this stage.

 The best part of this pre filing consultation is that it shall not

(i)                 bind the Board or the person to enter into an agreement or initiate the agreement process

(ii)               deemed to mean that the person has applied for entering into an agreement

4 Annual compliance report- the assess is bound to furnish annual compliance report every year and  if compliance audit results in finding of failure on the part of the assessee to comply with the terms of the agreement then board can have a right to cancel the APA.

5 compliance Audit- TPO’s are authorised to carry out compliance audit of APA every year of the agreement.

Lets Sum Up

APA’s are the contract between taxpayers and tax authorities for the multiple years.

The maximum term for an APA is 5 year and this mechanism is voluntary and this scheme is made applicable from the 30^th August 2012 from the date of issue of notification of rules in officially gazette.

The Arrangement of Advance pricing agreement are meant to ease the difficulties of taxpayers and also to reduce the increased litigation on the TP matters but as far as we can see that the proposed rules are not much in favor to assessee like non refund of application fee in case of even withdrawal of application or rejection of application or the and the annual compliance report and compliance audit which will be performed by the TPO’s. Finance ministry/CBDT need to take a re-look  on these parts. Although the initiation taken by ministry by introducing such provisions is good step.

I would like to mention a quote here “Tax complexity itself is a kind of tax.”