A new deal to resolve disputes

For multinational enterprises as well as tax administration, transfer pricing has become very important. While the former consider transfer pricing as tax neutral, the tax administration consider it to be a tool for shifting profits from one jurisdiction to another. In the recent time, arguably, transfer pricing has emerged as the most important subject in the arena of taxation in India.

Unconfirmed statistics shows that during the last three years, the amounts of adjustments have been doubling itself. It is also said that, in the last completed round of transfer pricing, the total amount of adjustments has been in the excess of Rs 40,000 crore.

Transfer pricing authorities have been particularly harsh on transactions such as management services, royalty payments, financial transactions like interest and guarantee, and trading activities. As international transaction involves two tax jurisdictions; any adjustment under transfer pricing results in double taxation.

The way out is to pursue normal litigation. However, this involves a lot of cost as well as time. Not only this, litigation fails to provide certainty. This puts pressure on the cash flow of companies. Unjustified adjustments do not go to add to the revenue of the country in the real sense as majority of additions are negated by the appellate authorities. In the end, no one gets benefitted.

Objective of APA

Tax administration ends up spending time and money on an exercise which does not yield the desired results. Hence, there is a need to look for alternative dispute resolution mechanism.

One of such measure is Advance Pricing Agreement (APA). APA is defined as an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the arm's length price.

The efficacy of an APA scheme for prevention of transfer pricing disputes is becoming popular. This can be seen from the fact that a well-entrenched APA regime is fully operational in more than 50 tax jurisdictions spanning the globe and also the fact that more and more tax jurisdictions are embracing (or are in the process of doing so) the APA scheme.

The objective of an APA is to deliver certainty, for both the taxpayer and the tax authorities, of the tax outcomes of the taxpayer's international transactions. Consequently, APAs provide a win-win situation for all the parties involved. APAs can be unilateral APA (between the taxpayer and the tax authority of the domestic company), bilateral APA (BAPA) (between the taxpayer and two tax authorities) and multilateral APA (MAPA) where multiple tax authorities are involved.

The draft Direct Taxes Code introduced APA scheme, which is in line with international practices. It provides that, once accepted by taxpayers and authorities, it will have binding effect for five years.

Win-win situation

This will provide certainty to taxpayer as well free scarce resources of the tax department for other works. The scheme allows taxpayer and tax authorities to adopt any method — not being restricted to the methods prescribed under transfer pricing regulations.

For the APA scheme to besuccessful, it is necessary that the negotiation is carried out in a transparent manner. Tax authorities should not consider this to be a revenue raising mechanism. At the same time, taxpayers should provide all information completely and truly.

There should be strict adherence to specified timeline for completing an APA. However, if the resolution of APA, particularly when two or more tax jurisdictions are involved, takes a longer time, provision should be to extend the normal timeline for compliance as well as passing of statutory orders by authorities.

To reduce litigation further, the APA could be made applicable to the open years. The scheme must provide comfort to taxpayers that, in case the negotiation fails, the information provided by them will not be used against them.

The success of the scheme will depend also on the persons involved in negotiation on behalf of the tax administration.

They should have wider outlook and should be specially trained for this work. The authorities may take help of outside experts. The success of the scheme will ensure a win-win situation for the taxpayers as well as tax authorities.

(S. P. Singh is Senior Director, and Richa Gupta is Director, Deloitte Haskins & Sells. The views are personal.)

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