Advance pricing agreements
The APA regime in a snapshot ►
The Government of India amended the Income Tax Act 1961 to enable an APA between taxpayers and the Indian Revenue Authority.
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The Rules notified by the Central Board of Direct Taxes provide detailed guidelines on the process to be followed.
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The Rules also contain the information, data, fee details and forms that need to be filed, the circumstances under which CBDT may discontinue an APA and compliance procedure for monitoring a concluded APA. A taxpayer is first required to undertake pre-filing consultations, which may be done on an anonymous basis, before a formal APA application is submitted. The taxpayer’s associated enterprise (AE) may initiate an APA process with the Competent Authority in the other country in case of a bilateral/multilateral APA.
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After almost 11 years of the introduction of transfer pricing regulations, the Government of India (GoI), through the Ministry of Finance, introduced the Advance Pricing Agreement (APA) program (also referred to as APA Rules) to provide certainty to taxpayers on the treatment of their inter-company international transactions. An APA helps decide arm's length pricing for current and future intercompany transactions and is signed between a taxpayer and the Indian Revenue (unilateral APA) or among the taxpayer, the Indian Revenue and other tax treaty partner(s) (bilateral or multilateral APA). The APA process allows all interested parties to agree on the facts of the cases, the most appropriate transfer pricing method (TPM) and the arm's-length results for covered transactions. The APA program provides a proactive opportunity to taxpayers to prevent controversies. It is designed to avoid the confrontation inherent in an examination and foster more effective communication between you (the taxpayer) and the relevant tax authorities by helping you and the tax authorities to focus on relevant facts and circumstances in advance.
Unilateral/bilateral/multilateral APAs The Indian APA Rules provide for unilateral, bilateral and multilateral APAs. Unilateral APAs with the Indian Revenue Authority will provide protection from India-initiated adjustments but will not safeguard from foreign-initiated adjustments (to the other associated enterprise). If an inter-company transaction spans two or more countries under the applicable income tax treaties, the bilateral/multilateral APA creates efficiency by involving associated competent authorities in negotiations from the outset and securing a wider protection.
India APA story so far In the first wave, close to 150 applications were filed by 31 March 2013 with the Indian APA authorities. This was following a round of pre-filing consultations by several taxpayers across industries. It is believed that approximately 80% of these applications are for unilateral APAs and the balance for bilateral APAs. The GoI is very happy with the response and the ground level authorities are taking steps to process these applications as rapidly possible. The APA negotiations in a few cases (involving issues such as valuation of share capital, arm’s length margin for design engineering services and investment advisory services) have already been successfully concluded and are pending for approval. Furthermore, in the second wave, it is believed that approximately 40 applications have already been filed with Indian APA authorities.
The APA regime in a snapshot (cont’d.) ►
The taxpayer is required to file an Annual Compliance Report (ACR) during the applicability of the APA.
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Such an ACR may be subject to scrutiny by the Indian Revenue Authority.
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Where APA exists, the regular audit of covered transactions would not be undertaken by the Indian Revenue Authority.
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The APA may be cancelled or revised in certain circumstances suo-motu by the Indian Revenue Authority or at the request of the taxpayer. In the case of the renewal of an APA beyond its tenure, the procedure for a fresh APA application will be followed.
Likely benefits of an APA ►
Certainty of tax treatment: This is the most important benefit to the taxpayer — if the taxpayer complies with the terms and conditions of the APA, the Indian Revenue Authority would regard the results as satisfying the arm's length standard. This may translate into freedom from adjustments and double taxation for the period covered under the APA.
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Time and cost savings: Overall, the APA process is likely to be less time consuming than a full transfer pricing audit and dispute cycle, where the litigation and a resolution could take as much as 10–12 years to reach the final verdict by the Apex court. In contrast, an APA would typically get resolved or agreed in one to two years and could provide protection for up to five years, subject to renewal after the period of expiry.
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Compliance documentation: Regarding international transactions covered under an APA, the onerous compliance with respect to India transfer pricing documentation may be reduced significantly after the APA has been entered into, and the Annual Compliance Report would probably be the only documentation required.
When to think of an APA ►
Where a taxpayer is confronted with recurring TP adjustments or litigation
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Where the size and complexity of international transactions assumes significant magnitude
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When approach applied/method used is likely to face stiff opposition from the Indian Revenue Authority
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When the pros and cons of an APA outweigh those of other dispute resolution mechanisms/channels
Traditional v. non-traditional avenues of resolving litigation Appended below are charts showing the traditional and non-traditional avenues of resolving litigation.
Supreme Court
Dispute Resolution Panel (DRP)
Traditional avenues
High Court
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Appellate Tribunal
Advance Pricing Agreements
Non Traditional Avenues
Commissioner (Appeals)
Assessing Officer
Authority of Advance Ruling (AAR)
National Tax Tribunal (To be notified)
Supreme Court or High Court
Mutual Agreement Procedure (MAP)
Some areas of prolific transfer pricing disputes where APA would be useful ►
Captive intra-group services
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Agency services or commission agents
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Procurement services and sales support services
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Limited risk distributors
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Payments for use in intellectual property
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Business restructuring transactions
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Allocation of headquarter and management fee
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Financial transactions such as loans and guarantees
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Sales supply chain structures
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Low-margin companies with significant intercompany transactions
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Contract manufacturing
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Commodity trading
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Valuation of shares
Where experience matters, EY leads Transfer pricing and tax controversy are increasingly becoming critical concerns for global businesses. All major tax administrations are expected to intensify transfer pricing enforcement, contributing to an unprecedented rise in controversy as multiple jurisdictions vie for the same taxable income. To help businesses tackle these challenges, EY has assembled a strong global network of prominent transfer pricing professionals, many of whom previously held senior roles involving transfer pricing issues with the Indian Revenue Authority. In the current environment, it is essential to take a proactive approach to address controversy by building productive relationships with tax administrators. When pursuing an APA, substantive transfer pricing knowledge is simply not enough. Advice from experienced APA professionals is likely to make a substantial difference at all stages of the APA process. EY’s global network of seasoned transfer pricing professionals could help taxpayers work more effectively with tax administrators around the world.
Sample of EY’s APA experience Country
EY professionals with former APA experience in government office
Number of completed APAs EY assisted client with
Number of current APAs EY is assisting clients with
Number of pending APAs per government (annual reports)
US
20
410
108
352
Canada
13
45
39
95
Mexico
2
103
3
n/a
Japan
2
261
73
300
Australia
2
65
18
35
Members of EY’s global network of APA professionals have negotiated hundreds of APAs with the Internal Revenue Services in the US and a large portion of APAs worldwide. During nearly 20 years of the US APA program, our professionals have regularly negotiated the largest number of reported APAs. In addition, our US team includes many professionals with government APA experience, including the original Director of the US APA program and two former US Competent Authority negotiators. We continue to expand our global network of experienced APA professionals. Recent hires by our firms in the Americas and Europe further strengthen our leadership role. As the number of APA programs around the world continues to grow, EY is committed to adding to our experienced network of APA professionals. If you are considering an APA, EY’s experienced team of transfer pricing professionals in India, with the support of its global network, would be more than willing to help you make informed, and practical decisions. It could also help with the economic analysis and represent you in negotiations with tax authorities. Contact your local EY representative for more information on how we can help.
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In the world of APAs, experience matters ►
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EY is representing taxpayers in approximately 30% of all APA applications that have been filed in India recently. EY has helped multinational enterprises obtain more than 400 APAs in the US and a large portion of the APAs around the world. Ernst & Young LLP currently represents taxpayers in 30% of the pending APAs at the Internal Revenue Service in the US. In the Americas, 35 EY professionals were former senior government officials with responsibility for transfer pricing controversy.
The EY advantage
Leaders in APA
We have negotiated 800+ APAs globally across 20+ countries
Our global network of transfer pricing advisors
1,500+ transfer pricing professionals spanning 50 countries
Tax authority insights
Taxing authorities discuss with our professionals on how to establish new APA programs. From assisting in the development of a preliminary APA strategy to final negotiations with government authorities, Ernst & Young has assembled a global network of transfer pricing professionals with the APA experience that matters.
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Global transfer pricing group includes former senior tax officials of 20+ countries
The India transfer pricing team
More than 220 transfer pricing professionals across the country
Our global network of transfer pricing advisors
1,500+ transfer pricing professionals across 50 countries
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We pioneered the APA process, having conducted the first APA globally in 1990.
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We were involved in negotiating the first APA in 11 countries (Australia, Belgium, Canada, the Czech Republic, Japan, the Netherlands, New Zealand, Norway, Slovak Republic, Thailand, the US).
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400+ people in 11 countries in the Americas
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270+ people in 13 countries in Asia Pacific
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270+ people in 26 countries in Europe, the Middle East, Africa
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100+ transfer pricing partners, principals and directors globally
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Six countries in the Americas (Argentina, Brazil, Ecuador, Mexico, the US, Venezuela)
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Five countries tax authorities in Asia Pacific (China, India, Indonesia, Japan, New Zealand)
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Twelve countries in Europe, the Middle East, Africa (Belgium, Denmark, Finland, Hungary, Israel, the Netherlands, S. Africa, Spain, Sweden, Switzerland, Turkey, the UK)
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The Transfer Pricing team consists of people from diverse academic and professional backgrounds such as accountants, economists, management graduates and lawyers.
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It has more than 30 transfer pricing partners, associate directors, senior managers and managers.
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The team has professional experience across a wide range of industries and sectors such as automotive, software and information technology, media and entertainment, telecommunication, pharmaceuticals and life sciences, retail, consumer goods, industrial goods, defense, agriculture and commodities, general trading, and infrastructure and real estate.
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400+ people in 11 countries in the Americas
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270+ people in 13 countries in Asia Pacific
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270+ people in 26 countries in Europe, the Middle East, Africa
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100+ transfer pricing partners, principals and directors globally
EY’s unique and market leading litigation practice ►
Our group of experienced senior professionals includes retired judges/Tribunal members with wide experience in representing before courts and tribunals
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Our team has experience of innumerable proceedings before Authority for Advance Rulings, Tribunals, High Courts and Supreme Court
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With pan-India coverage, our senior professionals/advisors are widely recognized before judicial forums in the country
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Our Litigation Group head was recognized as one of the top 10 tax dispute advisers in India by International Tax Review in 2011
EY India’s litigation credentials
Involvement in matters at Income Tax Appellate Tribunal
Matters handled before the Dispute Resolution Panel
Matters handled before the Authority for Advance Ruling
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375 + matters handled before the ITAT between July 2009 and May 2012 across locations and 6 matters before the Special Bench
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More than 90% success rate
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More than 60% appeals related to international tax and transfer pricing matters
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Represented 6 matters before the special bench
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Majority appeals handled by our senior litigation professionals
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Leaders with 33% (175 cases in FY11–12) market share in the western region (predominantly handled by senior litigation professionals)
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Handled 20% of the matters in Delhi/NCR region and 18% market share in the southern region
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Several successful orders despite a general negative view taken by the DRP across the country
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70% share in matters disposed before AAR in FY11–12
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More than 60% matters represented by senior EY professionals independently
Our Indian transfer pricing litigation professionals ►
Vijay is a Partner with EY’s Tax practice in New Delhi and is the national leader for transfer pricing and the regional leader for international tax (ITS).
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Over the past 18 years, he has been regularly advising clients on domestic and international tax matters. He has considerable litigation experience including litigation strategy and litigation support to clients. He appears regularly before the Dispute Resolution Panel (DRP) and appellate forums including the Income Tax Appellate Tribunal (ITAT).
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He has been rated as one of the world’s leading transfer pricing advisors for India by the Legal Media Group in its annual global guide, as well as by International Tax Review.
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Prior to joining EY, Ameet led the Transfer Pricing Committee of the Advance Pricing and Mutual Agreement (APMA) department of Internal Revenue Service (IRS) in the US.
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He has served IRS for almost 10 years in various roles. Key aspects of his role included negotiation of APAs with US treaty partners including Japan, Canada, and UK.
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Rajan is a Partner with member firm of Ernst & Young Global Tax practice and heads the Direct Tax Litigation group. He appears regularly before the AAR and ITAT.
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He has more than 35 years experience in corporate direct tax litigation before ITAT and AAR including in transfer pricing and international tax issues. He was named among the top 10 tax dispute advisers in India by International Tax Review in 2011.
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Ganesh is a Partner with EY’s Tax practice and is also the industry leader for the aerospace and defence sector.
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He anchors EY’s relationship with the Central Board of Direct Taxes (CBDT) and Ministry of Finance and is engaged in dialog on a regular basis with senior revenue officials regarding tax and fiscal policy issues. He has been a key negotiator before the Competent Authority for Mutual Agreement Procedures.
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His functional experience includes corporate tax planning, structuring cross-border investments and transactions, and joint venture negotiations.
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MP Lohia is an Executive Director with member firm of Ernst & Young Global Direct Tax Litigation team specialized in international taxation, transfer pricing and corporate tax.
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He is an ex-Indian Revenue Services officer and has worked in various capacities including Commissioner (Appeals) and Director of International Tax. Has also worked as the Under Secretary Foreign Tax Division of CBDT, Ministry of Finance, involved in policy and legislation matters.
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He appears regularly before DRP and Appellate forums including ITAT.
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Sharat Chandra is a Senior Advisor with EY and is based in New Delhi.
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He is an ex-Indian Revenue Services officer and has worked extensively in the Tax Policy and Legislation wing of CBDT. He was also a member of the core team that drafted the new Direct Tax Code.
Vijay Iyer
Ameet Kapoor
Rajan Vora
Ganesh Raj
MP Lohia
Sharat Chandra
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Our global virtual APA team
Monique Van Herksen
David Canale
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Monique Van Herksen is EY’s global head of transfer pricing controversy and also leads the tax controversy practice in Europe, the Middle East, India and Africa (EMEIA) area.
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Based in Amsterdam, Monique has extensive experience in cross-border dispute resolution, including mutual agreement procedures and arbitration.
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Monique is a member of many organizations including the transfer pricing advisory board of the IBFD, IFA, the EU Joint Transfer Pricing Forum, the Practice Council of New York University, and the UN's Subcommittee on Transfer Pricing — Practical Issues, which deals with transfer pricing in developing countries.
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David Canale is Ernst & Young LLP’s US Director of Transfer Pricing Controversy Services.
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With more than 15 years of extensive experience in transfer pricing consulting. David assists clients with transfer pricing policies and controversy resolution, including audit dispute resolution, APAs, mutual agreement procedures (MAPs) and monitoring tax treaties and competent authority.
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David’s combined Internal Revenue Service (IRS) and private practice APA and MAP experience includes more than 100 cases.
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Prior to joining Ernst & Young LLP, David served with the IRS’s APA Program in the Office of Associate Chief Counsel (International). He was the acting branch chief for the program and served as program coordinator for all bilateral APAs with Canada.
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He also developed strategies and coordinated with the US competent authority regarding negotiations with various treaty partners.
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John is based out of EY’s London office and has more than 15 years of consulting experience providing strategic transfer pricing advisory services and controversy/dispute resolution.
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Prior to joining EY, John was the former Investigation Manager and Competent Authority within the UK Inland Revenue Transfer Pricing Division.
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He also advised ministers on the introduction of the UK’s new transfer pricing laws in 1996 and also led double tax convention negotiations between the UK Government and those of countries including Kazakhstan, Venezuela, Bolivia and Ecuador. He also participated in negotiations on the current UK/US convention.
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He is the author of various transfer pricing publications and a regular contributor of transfer pricing articles to publications such as the International Transfer Pricing Journal, Euromoney and Tax Management Transfer Pricing. He is regularly cited as one of the world’s leading tax and transfer pricing advisors.
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Bob serves as a technical advisor assisting multinational organizations with global transfer pricing planning, tax-effective supply chain practices, documentation and local country controversy resolution. Bob is located in the Washington DC office of Ernst & Young LLP.
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Bob has considerable experience in resolving international transfer pricing controversies with the audit and competent authorities. Bob has 35 years of experience in dealing with international tax and transfer pricing issues with Ernst & Young LLP and the Internal Revenue Service (IRS). He was the initial Director of the Advance Pricing Agreement program at the US Internal Revenue Service (IRS).
John Hobster
Bob Ackerman
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Our global virtual APA team
E Miller Williams Jr.
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E. Miller Williams Jr. is Ernst & Young LLP’s Transfer Pricing Controversy leader in the Southeast Sub-Area of the US.
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Miller advises multinational corporate clients on a national basis regarding complex transfer pricing matters with emphasis on international transfer pricing controversy, Advance Pricing Agreements (APA), competent authority, etc.
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Miller has more than 19 years of transfer pricing advisory experience (5 years with the government and 12 years in private practice) with companies in a variety of industries.
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Prior to private practice, he served as a senior attorney in the Office of Associate Chief Counsel (International) for the US IRS and worked on a variety of transfer pricing and international tax matters. He worked in the IRS’ APA Program, where he acted as the lead attorney on many APA cases and as advisor to the Director on APA procedures.
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Tetsuya Bessho has considerable experience in transfer pricing in the areas of documentation, planning, controversy, APAs, and audit resolution including competent authority matters.
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During his 25 years in public service, he held various roles, including that of a taxation law examiner at Japan’s Cabinet Legislation Bureau and as an examiner of transfer pricing, APAs, as well as drafting directives on transfer pricing taxation at the Examination Department of the Tokyo Regional Taxation Bureau.
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He led a team at the Office of Mutual Agreement Procedures and played an active role in mutual agreement procedures with many success stories in regions such as North America, Australia, China and India.
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He continues to have close contact and influence with the Japanese tax authorities including high-level officials. He was selected as one of Japan’s tax controversy leaders in 2011 and 2012 by the International Tax Review.
Tetsuya Bessho
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Notes
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CONTACTS For more information please contact :
Vijay Iyer Tel: +91 11 4363 3240
[email protected] New Delhi, Kolkata, Chandigarh
Hitesh Sharma Tel: +91 22 6192 0620
[email protected] Mumbai
Paresh Parekh Tel: +91 22 6192 1342
[email protected] Mumbai
Aashish Kasad Tel: +91 22 6192 0630
[email protected] Mumbai
Jayesh Sanghvi Tel: +91 40 6736 2078
[email protected] Hyderabad
Rajendra Nayak Tel: +91 8067275454
[email protected] Bengaluru, Kochi
Anuj Khorana Tel: +91 124 671 4906
[email protected] Noida/Gurgaon
Keval Doshi Tel: +91 22 6192 0650
[email protected] Mumbai
Sanjay Kapadia Tel: +91 22 6192 0880
[email protected] Mumbai
Chetan Rajput Tel: +91 20 6603 6024
[email protected] Pune
Keyur Shah Tel: +91 22 6192 0970
[email protected] Mumbai
Dhinal Shah Tel: +91 79 6608 3850
[email protected] Ahmedabad
N Madhan Tel: +91 44 6654 8568
[email protected] Chennai
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