India has taken the much-awaited, extremely welcoming step to introduce its APA programme. With the total transfer pricing adjustments adding to Rs 45,000 crores, the MNCs are surely breathing a sigh of relief at the introduction of Advance Pricing Agreements (APAs); albeit, with apprehension regarding the APA programme rules. The Union Budget 2012-13 has proposed to incorporate the basic framework in the law, much on the lines contained in the Direct Taxes Code (DTC) draft, and enabled the Central Board of Direct Taxes (CBDT) to lay down the framework for India's APA programme. Further, the proposal allows going beyond the methods specified under transfer pricing regulations. The level of scepticism isn't out of place on the part of the taxpayers, given the fact that the Dispute Resolution Panel (DRP) process hasn't lived up to expectations, coupled with the fact that the transfer pricing safe harbours, enabled by the Finance Act of 2009, are yet to see the light of day. Nonetheless, the MNCs operating in India have their hopes pinned on the APA programme.

We discuss some of the fundamental features that the Board needs to consider while framing the APA rules.

Bilateral/ Multilateral APAs: It would be extremely meaningful to have bilateral / multilateral APAs that would entail more than one country and eliminate potential double taxation.

Cooperative process: An APA programme must involve a cooperative process where both the parties, the government and the taxpayers, mutually work towards arriving at a resolution. This will require a sea change in the mindset on both sides

Establish independence: It would certainly add a great level of credibility if the standing committee's recommendation is to be followed, and an independent agency is appointed to administer the APAs, which includes representatives from the industry, the economist fraternity, and technical experts.

Safeguard information: The biggest apprehension on the part of taxpayers would be that of the information being used against them in the event that an APA isn't concluded. The Indian APA programme must provide necessary safeguards against the use of the information disclosed during the APA process; else, it would be a significant deterrent for taxpayers to approach the APA office. Once again, the standing committee has also said so.

Critical assumptions: All APAs contain a set of certain assumptions that should be maintained for survival of the APA. Given the level of efforts involved in reaching an agreement, it would be in the interest of all parties to make sure that the APA doesn't fail. Therefore, the critical assumptions must be such that they allow for a little sway in business arrangements which aren't resulting from transfer pricing.

Rollback: While the APA will provide certainty for the future years, the Board must consider allowing a rollback of the agreed methodology to the prior years. By providing for a rollback, it would bring quick closure to disputes, by using a solution already agreed upon by both the parties. Although there are several more APA best practices, the above characteristics will provide the robust foundation necessary for the success of an APA programme in India. After all, price or value lies in the eyes of the beholder, and the APA programme has to enable both the taxpayer and the Revenue to work on this together.

(The authors are Leader, Transfer Pricing, and Transfer Pricing Dispute Resolution Lead, PwC India, respectively.)

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