This means that tax authority of another country would consent and agree to the APA entered into by and between the taxpayer and the tax authority in India.

Unilateral APAs are where the taxpayer and the tax authorities of home jurisdiction are involved. In the case of bilateral or multilateral APAs (that is, an arrangement in which two or more countries concurs) a second agreement is entered between the Competent Authorities (CAs) of countries, which are affected by the covered transaction. This second agreement is normally based on the mutual agreement provision of tax treaties between the jurisdictions.

In the Indian context, pending framing of the Scheme, prima facie it appears that the Direct Taxes Code provides for a unilateral APA mechanism. It would be important that for the APA programme to succeed it should contain a provision for bilateral/multilateral APA mechanism.

As per OECD recommendations, wherever possible an APA should be concluded on a bilateral or multilateral basis between CAs through the Mutual Agreement Procedure (MAP) of the relevant treaty. Whenever unilateral APAs are permitted, the CAs of other interested jurisdictions should be informed about the procedure as early as possible, so as to determine whether they are willing to consider a bilateral arrangement under MAP.

Administration of APAs: Each tax administration involved in the APA generally monitors compliance with the APA. First, it may require the taxpayer to file annual reports demonstrating the extent of its compliance with the terms and conditions of the APA and that critical assumptions remain relevant. Second, the tax administration may continue to examine the taxpayer as part of the regular audit cycle but without re-evaluating the methodology.

The pros: The benefits of APAs are risk management, certainty, avoidance of double taxation and reduced litigation. Some countries do away with the requirements of preparing onerous transfer pricing documentation by the taxpayer year on year after entering into an APA.

The revenue authorities also prefer APAs as they reduce lengthy audit activities. Because of concerns over double taxation, most countries prefer bilateral or multilateral APAs. The bilateral (or multilateral) approach is far more likely to ensure that the arrangements will reduce the risk of double taxation.

Challenges: A significant challenge of an APA is that it relies on predictions about future events. Critical assumptions may have been made in a manner which does not adequately reflect changing market conditions. It is necessary that an APA programme remains flexible, because a static APA may not satisfactorily reflect arm’s length conditions. APA might seek more detailed industry and taxpayer-specific information than would be requested during a normal transfer pricing examination. Also, the revenue authorities may become privy to highly sensitive information and documentation which would have its own challenges.

Further, taxpayer also need to have assurance that the past closed years will not be reopened for audit based on the transfer pricing agreed in the APA. Some tax administrations allow the taxpayer to request that the APA may be rolled back to cover earlier taxable years. The same is an effective mechanism for taxpayers to resolve existing audit issues.

This section investigates the frameworks of a number of different countries and their commitment to APA rulings as a solution to international transfer pricing issues.

Australia: Australia was involved with the US and Apple Computer in the first ever formal APA and has continued to encourage the completion of similar agreements. Taxation Ruling TR 95/23 provides guidance in dealing with Australia’s APA process. The APA programme is well established within the Australian Taxation Office (ATO), with over 100 APAs completed or renewed since its inception.

Canada: Started a formal APA programme in July 1995; there is a strong preference for bilateral or multilateral APAs if the foreign jurisdiction also has an APA programme. The 2007 annual report on the APA programme published by the Canada Revenue Agency reports that since the inception of the programme, 156 cases have been accepted, 108 completed (85 bilateral, 21 unilateral and two multilateral), and three have been unresolved.

China: Is one of the experienced countries in the world of transfer pricing. The process of executing an APA in China looks similar to that in the US with different stages — preparation, formal application, audit and assessment, negotiation, conclusion, and supervision. While most of the APAs concluded so far have been unilateral, including APAs involving multi-jurisdictions within China, five bilateral APAs have been concluded, including two with Japan, one with the US and two with Korea.

Japan: The Japanese National Tax Administration Agency (NTA) actively encourages taxpayers to apply for APAs. After the US, Japan probably has the most experience with APAs. The following features characterise the APA regime: anonymous pre-filing conferences are possible; typical APAs cover 3-5 years; rollbacks to past years are, in general, feasible; key documents must be submitted in Japanese; and profit-based and other methods not specified in Japan’s transfer pricing regulations are frequently accepted in bilateral APAs.

To encourage the use of advance pricing agreements, the NTA has also launched international information divisions in Tokyo and in Osaka. The number of APA applications submitted to the NTA has been increasing steadily - 93 in 2007 vs. 22 in 1997. The NTA also processed 70 applications in 2007 as against 5 in 1997

UK: The UK has formal APA procedures since 1999. The UK APA process only comes into play to resolve complex transfer pricing issues or in other cases where there is very significant difficulty in identifying the method to be used in applying the arm’s length principle. APAs may involve transfer pricing methods covering different types of related party transactions or for particular types of transactions only, as well as other, intra-group arrangements, including transfers of tangible or intangible property and the provision of services.

There are now possibilities to conclude bilateral or unilateral APAs with preference for a bilateral/multilateral approach. Also, there is ability to roll back application of the APA to earlier years given that the primary emphasis of an APA is to provide certainty for three to five years.

The US: In March 1991, the IRS published Revenue Procedure, which authorised APA contracts. A taxpayer is given flexibility to request a pre-filing conference. Detailed documentation requirements are laid out. As part of the contract, the taxpayer agrees to provide annual reports demonstrating company compliance with the APA, in particular highlighting the appropriate application of the selected Transfer Pricing Methodology.

The taxpayer is responsible for suggesting the initial period for which they want their APA to last. The actual start date is also at the taxpayer’s discretion. The conclusion is a memorandum of understanding between the governments and the taxpayer. Once this has been agreed, the taxpayer has the legal document drawn up, the APA, and the final act is the execution of this legal document. IRS will revoke an APA in the event of fraud or malfeasance.

To increase popularity of the APAs the IRS has planned to make public copies of APAs, but only after removing certain details such as the taxpayer’s identity, trade secrets, and confidential commercial or financial information Recently, the APA procedures have been modified to expand the scope of the APA Program’s purview to include other issues for which transfer pricing principles may be relevant, including: attribution of profits to permanent establishment under an income tax treaty, determining the amount of income effectively connected with the conduct by the taxpayer of a trade or business within the United States.

APAs – As the way forward from Indian tax regulation perspective

The introduction of APAs in India is a welcome measure and should provide a fair degree of certainty to business transactions, given the state of transfer pricing litigation.

In framing the APA programme, the Government will do well to adopt the best practices from other jurisdictions. These could include i) Simplicity in APA process and open negotiation; ii) Clearly defined goals and responsibilities for the APA programme; iii) Specialist resources with industry knowledge for the APA team; iv) Time bound process; v) Position on rollbacks; vi) APAs to be for a period of at least three to five years and a simplified procedure for small and medium taxpayers.

However, a tax payer must note that entering into an advance pricing agreement does not take away transfer pricing risks completely. The changes in facts and circumstances need to be closely monitored to ensure compliance with the terms of the APA.

Introduction of APA along with Safe Harbour provisions, the proposed Dispute Resolution Panel mechanism, risk based audit etc. are set to overhaul the Indian transfer pricing administration landscape