Post on 15-May-2018
Advance Pricing Agreements,
Mutual Agreement Procedures
and Safe Harbour Rules
Alpana Saksena
11th April 2014
Chamber of Tax Consultants
4th INTENSIVE STUDY COURSE ON
TRANSFER PRICING
1 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN
BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING
PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii)
PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY
ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons, without
limitation, the tax treatment or tax structure, or both, of any transaction described in the
associated materials we provide to you, including, but not limited to, any tax opinions,
memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are subject
to change. Applicability of the information to specific situations should be determined through
consultation with your tax adviser.
2 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Indian Transfer Pricing environment
TP Adjustment scenario at present
“TP adjustments amounted to Rs 60,000 crore in FY 2013-
14 i.e. declined by 14% compared to
FY 2012-13.
(Source: Financial Express newspaper 10 March 2014)
3 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Indian Transfer Pricing Environment (Continued)
Hot Topics
R&D cost plus mark-up
Royalty
Advertising, Marketing, Promotion expenses
Management Fee
Marketing Intangibles
Attributing Global Profit
to India
4 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
India - Traditional Dispute resolution – An Overview
Transfer Pricing audit
DRP / 1st Appeal
(Commissioner (Appeals)
2nd Appeal
Income tax Appellate
Tribunal
3rd Appeal
High Court
Final Appeal
Supreme Court
Level of authority / Court
Simultaneous MAP option
4 years from date of filing return
Often repetitive additions
9 months to 3 years
2 - 3 years
5 years
5 years
Domestic litigation - Total time 15 years +
Only substantial
questions of law
Final authority on
factual issues
5 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Mutual Agreement Procedure (MAP) – To avoid double taxation and provide relief
MAP is an alternate mechanism incorporated into tax treaties for the resolution of international
tax disputes
Resolution of disputes through the intervention of competent authorities of each country who
evolve a mutually acceptable solution
Relief through MAP possible irrespective of remedies available under domestic tax laws
Mutual Agreement Procedures
6 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Overview of MAP procedure
MAP request
Tax payer makes MAP application in prescribed form to CA of home country
Request can be made where there is double taxation or taxation inconsistent with treaty
Consultation
Host country CA called upon for dispute resolution where issue cannot be resolved unilaterally by home country CA,
Admission
Acceptance of Application at CA’s discretion
CA can call for additional information from tax payer at this stage
Representation
Tax payer may be called for making written or oral representations
Negotiations
CAs initiate negotiation and attempt to reach an amicable resolution
The tax payer is not involved in the negotiation process however he may be called upon to make submissions
Solution
Proposed agreement communicated to the Taxpayer for his acceptance
Solution to be given effect to within 90 days, if taxpayer consents
Generally the entire process takes 2 – 3 years for completion
7 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Safe Harbour Rules - Applicability
The below Safe Harbour margins shall be applicable:
Eligible International Transaction Safe Harbor Margin
IT & ITES Services with significant risks where the aggregate value of
such transactions
• < INR 500 crore
• > INR 500 crore
Operating profit margin to operating
expense :
20 percent or higher
22 percent or higher
KPO services, with insignificant risks Operating profit margin to operating
expense is 25 percent or higher
Intra group loan to wholly owned subsidiaries where the amount of loan
• < INR 50 crore
• > INR 50 crore,
Interest rate equal to or greater that the
base rate of SBI as on 30 June of the
relevant previous year:
• plus 150 basis points
• plus 300 basis points
8 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Safe Harbour Rules - Applicability
Eligible International Transactions Safe Harbour Margin
R&D services with insignificant risks, wholly or partly relating to
software development.
Operating profit margin to operating
expense is 30 percent or higher
Contract R&D services, with insignificant risks, wholly or partly
relating to generic pharmaceutical drugs.
Operating profit margin to operating
expense is 30 percent or higher.
Manufacture and export of :
• Core auto components
• Non core auto components
Where 90% or more of total turnover relates to Original equipment
manufacturer sales
Operating profit margin to operating
expense :
12 percent or higher
8.5 percent or higher
Explicit corporate guarantee to wholly owned subsidiaries where the
amount is guaranteed
• < INR 100 crore
• > INR 100 crore,
And the rating of the borrower, by SEBI registered agency is of the
adequate to highest safety
•Commission /fee of 2 % or more per annum
•Commission /fee of 1.75 % or more per
• annum
9 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
9
Safe Harbours are said to be convenience prices which are higher than the Arm’s Length Price.
The option of being governed by Safe Harbour Rules shall be valid for a period of five years starting with
AY 2013-14 or for a lesser period at the option of the taxpayer.
No economic or other adjustments allowed to taxpayers opting for Safe Harbour.
Range of +/-3% not allowed.
No respite is provided from maintenance of mandatory documentation.
A taxpayer opting for Safe Harbour rules will not be able to avoid possibility of economic double
taxation.
Companies opting for Safe Harbour not allowed to opt for MAP proceedings
Due to apprehension in various industry sectors - Government has issued instructions that Safe
Harbour margins not to be followed for general Audit or APA purposes.
Tepid response to Safe Harbour option due to very high markups
Safe Harbour Rules – Our observations
10 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Safe Harbour Rules – Key considerations
Sub-categorization of sectors
Increased litigation as interpretations and
justifications can vary
High Margins
Loans
The provisions are meant only for rupee
denominated loans to WOS.
The SBI base rate as on 30th June of the
previous year has been recommended as
the Base Rate with no justification
Guarantees
Corporate guarantee rate of 2% is higher
than the prevailing bank charges.
Compliance burden
Does not relieve the assessee from
documentation requirements as provided
under Sec 92D.
Basic objective of simplicity and easy
compliance is not being met
12 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
12
Purpose
Basis
Validity
Post APA
APA Program – Basic Legislative Provisions
Sections 92CC to 92CD of Income Tax Act 1961
• APA to be entered into with Central Board of Direct Taxes (CBDT) :
for either determining the Arm’s length price (‘ALP’) or
specifying the manner in which the ALP is to be determined
• Arm’s Length Price will be determined on the basis of methods prescribed in the Income Tax act or
any other method suitable to determine the ALP
In arriving at ALP suitable adjustments / variations can be claimed
• Valid for a maximum of five consecutive years
• Binding on taxpayer and Commissioner and subordinate authorities
• Not binding if there is a change in law or facts having bearing on APA
If an APA covering a particular year is obtained after filing of tax return
a modified return is to be filed based on the APA and
an assessment is to be completed based on such modified return
13 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
APA Rules – Operating Guidelines
(Announced 30th Aug 2012)
13
APAs can be unilateral as well as bilateral / multilateral
Model Article 9(2) necessary for Bilateral APA – India Practice makes it essential
Transactions to be covered
existing transactions (application to be filed by March 31 for transactions beginning 1st April)
new international transactions (application can be filed before undertaking transactions)
Pre-filing consultation mandatory - specified format (anonymous option available)
Specified format for APA application - withdrawal / renewal of APA possible
Schedule of APA fees
Annual compliance report required , compliance audit would follow.
Particulars Fees
Transaction value up to INR 1 bn (approx USD 20 mn) INR 1 million (approx USD 20,000)
Transaction value up to INR 2 bn (approx USD 40 mn); INR 1.5 million (approx USD 30,000)
Transaction value above INR 2 bn (approx USD 40 mn) INR 2 million (approx USD 40,000)
Rules 10F to 10T of the Income Tax Rules 1962
15 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
APA Process – A quick overview
Application for pre-filing
consultation
Pre-filing Post-prefiling Phase
Pre-filing Consultation (Form 3CEC)
Pre-filing Process and Outcome
The APA Application (Form
3CED)
Negotiation & Settlement
Annual Compliance (Form 3CEF)
Key milestones
Taxpayer to file a YOY
compliance report
with to demonstrate
compliance with APA
terms
TPO to conduct
compliance audit, to
verify compliance
with APA terms
TPO to submit audit
report to DGIT within
6 months
Concluding pre-filing
consultation
Formal APA application
lodged Concluding APA
Detailed
application
developing
information
provided at pre-
filing stage
Forecasts
estimates required
• Submission reviewed by
APA Team
Site visits, discussions,
joint meetings to gain a
better understanding
After review, analysis &
evaluation stage,
positions of the APA
team is discussed and
agreed with the
taxpayer
APA signed
Prescribed format
requires details of:
Covered transactions,
Functions, assets,
risks
Proposed
benchmarking
methodology, PLI,
Comparables
Critical assumptions
Past audit history
APA team holds
consultations to
Explore suitability
of APA
identify issues for
detailed discussion
Discuss scope of
covered
transactions
Are non binding
Outcome will be
conveyed in writing
Key details
15
16 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Application
Specified format for APA application - withdrawal/renewal of APA application possible
Single application - taxpayers can request for Unilateral APA for certain transactions and
Bilateral APA for other transactions, even in one application
Mere filing of APA application will not have any impact on action by the AO and the TPO
Experts
APA Directorate includes panel of experts such as Economists, Statisticians, etc.
DGIT (Intl Tax) has power to nominate experts – Experts to be taken from Govt
Departments and their services would be case specific and need based.
Compliance Annual compliance report to be filed
Annual compliance audit to be conducted
Critical
Assumptions
Factors and assumptions that are so critical and significant that neither party entering into
an agreement will continue to be bound by the agreement, if they are changed
Revision of
APA
APAs can be revised by the CBDT either suo-moto or on request of the taxpayer / DGIT /
CA in case of
change in critical assumptions;
failure to meet conditions subject to which the agreement has been entered into;
change in law; or
request from CA of other country in case of BAPA and MAPA.
Rollback Absence of Roll back mechanism
APA – Key Provisions (1/3)
17 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Cancellation of
APA
APA may be cancelled in case of
failure of the taxpayer to comply with the terms of the agreement;
failure to file the annual compliance report in time;
annual compliance report filed contains material errors; or
the applicant does not agree for revision of the APA
Cancellation of agreement by CBDT No appeal possible. Taxpayer can take recourse to constitutional remedies.
Fees
Fees (only at APA Application stage)
APA fees based on expected value of transactions – If value of the international
transactions eventually happens to be more than what was earlier projected, it
would have no effect on the quantum of fee which has already been paid.
Transaction Value Fees
Up to Rs 1 billion / approx US$ 20 million Rs 1 million / approx US$ 20,000
Up to Rs 2 billion / approx US$ 40 million Rs 1.5 million / approx US$ 30,000
Over Rs 2 billion / approx US$ 40 million Rs 2 million / approx US$ 40,000
APA – Key Provisions (2/3)
18 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
APA guidance
with FAQs –
Issued by
CBDT
APA for PE profit attribution - if taxpayer admits having PE, APA request could be
filed for profit attribution to PE.
Impact of past year’s litigation - past history is one of will be discussed during the
APA process. However, it is not mandatory that the same position as taken in
the past shall guide or decide the APA process. The APA authorities would look
at the evidences and information with an open mind
No surprise field visits
Interlinked transactions - If one international transaction is intrinsically linked with
another and cannot be benchmarked independently, both the international
transactions need to be covered.
MAP not available for concluded Unilateral APAs
No benefit of +/- 3 percent variation – Once ALP is determined in accordance
with an APA agreement, there is no provision for allowance of 3% variation
APA – Key Provisions (3/3)
20 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
20
Why Advantageous?
Anonymous
Preparation required
Mandatory Prefiling – The gateway to APA
Advantageous even if
APA not pursued
Requires similar preparation as for TP Audit report
Structured format gives clarity in respect of information required
Affords an opportunity to test waters, gauge receptivity of revenue
Identify issues that will require specific development
Can help taxpayer decide whether APA can be achieved
No fees for prefiling
Advantageous to taxpayers with difficult dispute history
Veil of anonymity could help in frank discussions
Pre-filing could be instructive
Could provide valuable insights into strength and weakness of APA
proposal and business strategies and models
Assist in being better prepared for TP audit
21 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Typical Transactions for APAs
21
India specific transactions suitable for APAs
Software development & ITES services
Management services and royalty pay outs
Contract R&D (Pharma / Software)
Contract manufacturing
Intercompany loans, advances and guarantees
Distributors and marketing intangibles
Start up companies with losses
Any new transactions - no dispute history
22 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Are you ready for an APA? Options to pursue?
22
Probably
Yes
Nature of
transactions
Transactions critical to business
In perpetual dispute and litigation
New transaction – possibility of dispute
Losses / contentious audit triggers
Cost benefit
Analysis versus
outcome
Time / expense/ resources vs size of transactions
Transactions too small and simple
No disputes with tax authorities
Outcome of audit vs APA would be similar
Looking for
certainty ?
Regardless of nature of transactions
Tax authorities habitually aggressive
Litigation processes lengthy / outcomes uncertain
Goal is to manage potential controversy
Probably
Yes
Probably
NO
When unilateral
When the dispute is primarily in India
If relationships between CAs strained
If APA program new in country of operation
Other
cases
Bilateral
When bilateral
Transactions are interdependent
Where the anticipated outcome in India may be different and
therefore needs to be agreed upon with overseas CA
When possibility of economic double taxation exists
Bilateral
23 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Pros & Cons of an APA
P
R
O
S
C
O
N
S
Certainty for 5 years with simpler compliances after the APA has been entered into
Reduces risk of double taxation
Reduces documentation burden
Time and cost saving
Preferred by tax authorities
Mandatory pre-filing consultation helps in taking a decision for entering into an APA
Possible persuasive value in litigation and open audit years
High upfront cost
No time limit prescribed under the APA rules
Onerous details required in Pre-filing / APA application
No Rollback provisions
25 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
APA Program – Experience (1/2)
APA pre-filing meetings do not bind either party to the APA Program
Government sources - hardly any anonymous applications have been filed, which is a pointer that taxpayers
have posed faith in the program
Preparation
• Capture core arguments powerfully to enable negotiating parties to assess information efficiently.
• Caution while relying on methodologies followed in past TP documentation especially in case of adverse outcome in the preceding years.
Filling the form
• Key - how the taxpayer structures answers to the information requirements –
• Caution for areas which require subjective analysis or estimation.
• Ambiguity should be avoided
• Prescribed form should be filled up accurately, consistent with regulatory requirements.
Discussion Process
• Pre-filing meetings should be used to up front clarify what both sides expect from the APA process.
• Several back and forth queries
26 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
26
Discussions
• First round of discussions already in process - experience satisfactory so far
• International TP experts have welcomed the collaborative approach of the Indian APA team
FAR
• strong emphasis on finalizing mutually agreeing on detailed FAR
• Economic analysis will be done post FAR analysis followed by rounds of discussions and negotiations
Site Visits
• Site visits by the APA teams in progress - helpful in assessing the correct functional profile.
• Visits scheduled in consultation with taxpayers - conducted in a cordial and un-intrusive manner.
Applications
• 146 APA applications filed for last year (150 prefilings had been received)
• MNC giants from pharma, consumer electronics, media, cement, telecom, etc. have filed applications
• In several cases, position papers sent to CBDT for approval/recommendations –
Revenue perspective
• Due to sensitivity of business information highest level of confidentiality will be maintained
• Cancellation of APA could be done only by CBDT - APA will not be cancelled for any arbitrary reason
5 Unilateral APAs signed on 31 March 2014
APA Program – Experience (2/2)
27 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
APA – Regulatory Set up in India
Chairman CBDT
DGIT (Intl Tax)
Commissioner APA
Delhi Mumbai Bengaluru
Competent Authority
Director APA
Under
Secretary APA - I
Under
Secretary APA - II
Additional Commr (APA)
Joint
Commr (APA)
Deputy Commr (APA)
Joint
Commr (APA)
Additional Commr (APA)
Assistant Commr (APA)
Deputy Commr (APA)
Deputy Commr (APA)
BILATERAL
28 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
Questions & Answers
Questions
&
Answers