Certainity in uncertain times

Being a new law, trasfer pricing (TP) has emerged as the single largest source of tax litigation in India. Over the last seven rounds of TP audits, substantial adjustments have been made, most of which are pending litigation in tribunals or courts. This uncertainty/lack of clarity in matters relating to TP is having a negative impact on the Indian economy and also the country’s tax administration. The situation requires the introduction of Advance Pricing Arrangements (APAs) on an urgent basis.

An APA is an arrangement between the taxpayer and the tax authority made before the actual transaction to solve potential taxation disputes in a cordial manner. The taxpayer and the tax authority mutually agree on the transfer pricing method to be applied, its application for a certain future period of time, critical assumptions governing the transaction, etc. An APA is, thus, a pre-transaction analysis rather than a post-mortem. APAs can be applied for a variety of transactions, e.g. dealings in goods/services, financing arrangements, transfer and use of tangible/intangible assets, etc.

 

An APA may be unilateral, bilateral or multilateral, depending on the number of jurisdictions involved. In bilateral/multilateral APAs, the tax authorities of two countries negotiate with each other in order to reach an agreed position to avoid double taxation.

Certain countries also allow the application of the TP methodology to tax years before those covered by the APA, which is referred to as rollback of the APA/TP methodology, to avoid protracted litigation. This provision, if introduced along with the APA mechanism, can be a pragmatic solution to India’s TP litigation.

Some of the other aspects that the government could keep in mind while formulating the Indian APA programme are the eligibility for APA to be based on complexity/materiality of transaction, involvement of industry experts/economists in the APA programme, officers negotiating APA being different from those conducting field audits, minimal documentation requirements for annual compliance with APA, etc.

Rahul K Mitra
Leader (Transfer Pricing), PwC India

(With inputs from Nishant Saini, Senior Manager, Transfer Pricing, PwC India)