'Bilateral APAs eliminate double taxation'

The APA programme was introduced in India by the Finance Act, 2012, as a method of proactive dispute resolution and took off operationally on July 1, 2012. At the time of its introduction, this programme me was perceived to be the only silver lining to the rather dark clouds of Indian transfer pricing (TP) related litigation, which had been increasing at an unabated pace each year.

An APA is an agreement between the Indian government and the taxpayer that determines in advance the most appropriate TP methodology or the arm's length price (ALP) for covered intercompany international transactions for a future period of time (five years as per the Indian APA regulations, subject to fulfilment of agreed critical assumptions). Unilateral APA involves the taxpayer, and the Central Board of Direct Taxes (Board), while a Bilateral APA is an agreement between the Board and the taxpayer, subsequent to, and based on, any agreement between the Competent Authority (CA) in India with the CA in the other country regarding the most appropriate TP method or the ALP.

According to the APA-related frequently asked questions (FAQs), no bilateral APAs are currently permissible in the absence of Article 9 in the respective double taxation avoidance agreement between India and the respective jurisdiction. The position ought to be revisited as bilateral APAs would ensure elimination of double taxation. This would also facilitate increase in the number of filing of bilateral APAs.

As on March 31, 2014, the government had signed its first set of five unilateral APAs with MNCs fixing their tax liability in cross-border transactions over the term of the APA. On December 19, 2014, the government signed its first bilateral APA with Japan.

Around 350 APAs have been filed since the introduction of the APA programme. Some of these cases are likely to have pending TP litigation, and taxpayers are keen to avail of the 'roll back' mechanism announced by the government in last year's Union Budget. This enables the results of the APA to be applied to four prior years. However the rules are yet to be notified.

Taxpayers are awaiting the announcement of a fresh set of negotiated APAs. Accordingly, introduction of the "roll back" rules along with news of successful closure of APAs would facilitate more taxpayers to consider the APA programme. This will make the programme one of the more meaningful mechanisms of effective dispute resolution in India.

Rohan K Phatarpheka
Head - transfer pricing KPMG India, Global Transfer Pricing Services