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Transfer Pricing in India CA Hiren D.Shah Ahmedabad [email protected] Indian Regulations. Genesis for New TPR. In India, while introducing the new transfer pricing regulations the Finance Minister said:

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Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Transfer Pricing in

India

CA Hiren D.Shah

Ahmedabad

[email protected]


Indian regulations

Indian Regulations


Genesis for new tpr

Genesis for New TPR

  • In India, while introducing the new transfer pricing regulations the Finance Minister said:

    • The presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in their intra-group transactions has made the issue of transfer pricing a matter of serious concern. I had set up an Expert Group in November 1999 to examine the detailed structure for transfer pricing legislation. Necessary legislative changes are being made in the Finance Bill based on these recommendations.


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Features

  • Introduced by the Finance Act, 2001

    • Finance Act 2002 - clarificatory amendments

    • Circular 14 – Memorandum explaining new TPR

  • Based on the Arm’s Length Principle

  • Initial Burden of Proof is on the Assessee


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Overview of Presentation

  • Meaning & Introduction

  • Important Concepts

  • Documentation & Audit

  • Transfer Pricing Audit Process

  • Powers of Assessing Officers

  • Impact of Adjustments made to TP


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Meaning

&

Introduction


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

The process of fixation of Pricing of any Transaction between Associated Enterprises of MNC’s is known as “Transfer Pricing”


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Overview - Indian Regulations


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Developments – Indian Regime

Finance Act 2001, introduces

detailed Transfer Pricing Regulations

April 2001

21 Aug 2001

Rules 10A to 10E notified

Circular No. 12 issued – Guidelines

to AO’s. Beneficial to Assesses

23 Aug 2001

Circular No. 14 issued – Explaining

Provisions of Finance Act, 2001

Dec 2001

April 2002

Guidance Note issued by the ICAI.

Finance Act, 2002 introduced –

Clarificatory Amendments made

Dec 2001


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Section 92

  • Provides for computation of –

    - Income

    - Expenses

    - Cost Contributions

    at Arms Length Price (ALP)

  • ALP means price applied or to be applied in transactions between unrelated persons & in uncontrolled conditions.

  • TPR not to apply to cases which has the effect of reducing income chargeable to tax or increase the loss [s. 92(3)]


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Concept

Independent entity

Associated enterprise

International transactions

- goods

- services

- intangibles

- loans

Resident

Resident

Transfer price

Arm’s length price


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Associated Enterprises

  • Enterprise regarded as AE – Section 92A (1)

    • Based on the concept of commonality of Control. Management or Capital as contained in Article 9 of the OECD Model Tax Convention

  • Enterprises deemed to be AE – Section 92A (2)

    • Capital –

      • Shareholding (a & b), Loan ( c ), Guarantee for borrowing (d), interest (e);

    • Management

      • Appointment of Directors or Executive Director (e & f)

    • Control

      • Intangible property (g), production/trading activities (h & i) , others (j & K )

    • Relationship of mutual interest (m)


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Transaction [S. 92F(v)]

  • Transaction includes an arrangement, understanding or action in concert –

  • whether or not formal or in writing;

  • whether or not intended to be enforceable by legal proceedings.


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

International Transaction [S. 92B]

A transaction between two

Associated Enterprises,

Either or both of whom are

Non - Residents,

in the nature of

Purchase, sale, lease of

Provision of Services

Borrowing/Lending of money

Tangible/intangible property

Cost Sharing arrangements


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Applicability of Transfer Pricing

Branch & HO Issues

Whether TPR would apply to

transactions between Indian residents

& their foreign branches.

Whether, TPR would apply to

transactions between foreign residents

& their Indian branches.


Specified date accountant

Specified Date & Accountant

  • Important in the context of transfer pricing Documentation & Audit.

  • Every assessee to whom TP applies shall keep the documentation ready upto the specified date and also furnish a report of an accountant.

  • Specified date means the due date for filing the income tax return of the respective assessee u/s 139.

  • Accountant means a ‘Chartered Accountant’ in practice and would also include ‘Restricted state auditors’.


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Methods

  • Price applied in a transaction between independent enterprises in uncontrolled conditions

  • To be determined by applying the Most Appropriate Method, being one of the following five methods

    • Comparable Uncontrolled Price (CUP) Method

    • Resale Price Method (RPM)

    • Cost Plus Method (CPM)

    • Profit Split Method (PSM)

    • Transactional Net Margin Method (TNMM)

  • In case, more than one price is determined by MAM:

    • Apply Arithmetic mean

    • Range of + 5% of the arithmetic mean

Traditional transaction methods

Transactional profit methods


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Computation Provisions


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

  • ALP to be determined by any the methods, specified under s. 92C, being the Most Appropriate Method (MAM).

  • MAM to be applied in the manner prescribed by Rule 10C

  • Range of +/- 5% permitted.


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Factors to be considered for selecting comparables (Rule 10B)


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

  • Characteristics of property / services.

  • Functions performed, risks assumed, assets / resources employed by the respective enterprises.

  • Contractual Terms

    • Credit terms & mode of payment

    • Volume of Sales / Purchase

    • Selling or Buying Commitments, etc.

  • Economic conditions:

    • size of the enterprises

    • geographical locations

    • size of the market

    • regulatory framework

    • cost of layout & capital, etc.


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Documentation

&

Audit


Background

Background…

  • Transfer Pricing, not a science but an art.

  • Transfer Price for the same transaction can be different for the assessee & the assessing officer.

  • Transfer pricing depends upon both the nature of the enterprise & the transaction.

  • Proper documentation shifts the burden of proof on the assessing officer.


Legal framework

Legal Framework

  • Legal requirements for maintenance of information & documentation contained in s. 92D r.w. Rule 10D.

  • S. 92D r.w. rule 10D prescribes the categories of documentation to be maintained and the period for which it is to be maintained.

  • Legal requirement for submission of report of an accountant (T.P. Audit) contained in section 92E r.w. Rule 10E.


Prescribed documentation

Prescribed Documentation

Documents to be maintained

Principal

[Rule 10D(1)]

Supportive

[Rule 10B(3)]

ICAI’s Classification

Enterprise

related

Transaction

specific

Computation

related


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Brief Classification of Principal Documents

Enterprise related

Transaction

specific

Computation

related

  • Reasons for rejection of a particular method

  • Methods selected for determining ALP

  • How is MAM arrived at & how it is applied

  • Nature & terms of International Trns. (IT)

  • Records having a bearing on IT..

  • Records of Forecasts & analysis

  • Analysis Performed (FAR Analysis)

  • Records of Comparable uncontrolled transactions

  • Ownership structure

  • Group Profile and details of AEs

  • Business overview


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Ownership Structure of Group

  • Shareholding pattern / Membership interest; viz. Name of the shareholder / partner and % of shareholding / int.

    • Reference may be had to the Statutory registers maintained, if any

  • Generic classification in case of large number of shareholders

  • Changes in the shareholding pattern needs to be properly documented

  • Direct and indirect ownership interest in the taxpayer


Graphical presentation of group profile

Graphical Presentation of Group Profile


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Profile & Business Overview

  • Profile of the multinational group:

    • Ownership Linkages & Legal Structure

    • Principal line of business

    • Geographical areas of operation

    • Summarised global financials

  • Overview of Business & Industry:

    • Broad description of industry in which the taxpayer operates (Reference can be made to ITC / NIC codes)

    • Business Model used

    • Technology employed

    • Products manufactured / traded

    • Markets addressed / competition faced

    • Geographical Dispersion of activities


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Computation related Documents

  • Workings of all the methods used for determining ALP

  • Reasons for rejection / selection of particular method

  • Reasons for selecting a particular method as MAM

  • Workings of actual application of MAM

    • includes details of adjustments made to account for differences between controlled & uncontrolled transactions

MAM should be the reliable measure of Arm’s Length Price


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Supportive Documents [10B(3)]

  • Official publications, reports, studies & databases from Government of foreign countries

  • Research reports & technical publications of institutions of national or international repute

  • Published accounts & financial statements relating to business affairs of associated enterprises

  • Price publications including stock market quotations or commodity market quotations

  • Agreements, etc. with AEs or unrelated parties in respect of similar international transactions.

  • Letters & other correspondence documenting any terms negotiated between the assesse & the AE

  • Documents normally used in this connection under the accounting practices followed


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Relief & Other Requirements

  • Assessees having aggregate value of international transactions as recorded in the books of accounts less than Rs. 1 crore exempted from maintaining prescribed documentation

    • However, assessee shall be able to substantiate its transfer price based on the material available with him

  • Documentation, so maintained shall be contemporaneous to the extent possible

  • Prescribed documentation to be kept & maintained for 8 years from the end of the relevant AY

  • No fresh documentation required in respect of same international transaction continuing over more than one year unless there is significant change in:

    - nature or terms of international transactions

    - assumptions made or other factors


Transfer pricing study

Transfer Pricing Study

Benchmarking

Manage the

process

Functional

Analysis

3

2

4

Documentation

1

5

Accountant’s

Report

Gathering

Background

Information


Transfer pricing study report includes

Transfer Pricing Study Report includes..

  • Nature of International Transaction

  • Details of Associated Enterprise

  • Profit Level Indicator

  • Selection of Most appropriate Method – Justification for selected method and reasons for rejecting other methods

  • Access to Database

  • List out Comparables

  • Accept – reject matrix ( Filtration Process)

  • Benchmarking Analysis

  • FAR Analysis


Data search strategy

  • :Development of Data Search Criteria

  • Data Search is an Art

  • Initial Identification and Screening

  • Secondary Screening, Verification and Selection.

  • Data Search is tedious Process

  • Prowess and Capital Online Software available for Data Search

DATA SEARCH STRATEGY


Data search strategy1

DATA SEARCH STRATEGY

Database A

Database B

Database C

Database

Industry

Core Manufacturing

40 Companies

Elimination of companies with insufficient data

25 Companies

  • Data – Non Availability,

  • Continuous Loss making,

  • Companies not engaged into R&D

  • Sales Filter 5. Government Ownership

Quantitative

Criteria

15 Companies

Qualitative

Criteria

1. Segment Analysis

2. Must not engage in significant related party transactions

3. Must not own valuable IPRs

8 Acceptable Companies for Comparison


Comparability analysis

Comparability Analysis

  • Document the entire Data Search Strategy which may include:

    • Identification & Listing of internal & external comparable uncontrolled transactions

    • Nature & Terms of such comparable uncontrolled transactions

  • Document all the comparables found in the search process, which may include:

    • Sources utilised

    • Initial List

    • Rejection Criteria

    • Final List

Electronic Databases facilitates effective

Data Search Strategy


Functional analysis

Functional Analysis

By Functional Analysis - one also refers to FAR analysis, which means an analysis of Functionsperformed, Assets employed & Risks assumed by various components of a Group.

Understand ‘Business process’

for effective FAR Analysis


Transfer pricing audit process

Transfer Pricing Audit Process


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Identification of Intra Group Transactions

A

Selection of most appropriate method

FAR Analysis

Determination of ALP

Identification of comparable transactions

Adjustments

Documentation

Establishing Comparability, Adjustment for material differences

Report Filling

A


Identification of intra group transactions

Identification of Intra Group Transactions:

  • Business operations of the company should be analysed and a brief summary should be prepared.

  • The company is the ‘TESTED PARTY’ for the purpose of Transfer Pricing Review Process. T

  • The company’s relevant cross border transactions with AE should be identified and briefly described.


Far analysis

FAR Analysis:

  • A brief functional analysis should be prepared exhibiting functions performed, risks assumed and assets deployed by the participating entities.

  • A preliminary search was performed for ‘potentially comparable’, uncontrolled transactions’.


Identification of comparable transactions

Identification of comparable transactions:

For identifying comparable transactions, one must understand what comparability is.

Comparability means

  • Comparisons of conditions of taxpayer’s relations with those of independents.

  • Comparability is wider than just a search for (external) comparable or than a mere systematic comparison of financial information.

  • But it is more emphasis on quality and reasonableness


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

One must satisfy five comparability factors

  • Five factors determining comparability:

    • Characteristics of property or services

    • Functional analysis (functions performed, assets used, risks assumed)

    • Contractual terms

    • Economic circumstances

    • Business strategies


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Some other points are also kept in mind such as:

  • Recognition of the actual transactions undertaken

  • Evaluation of separate and combined transactions

  • Use of an arm's length range

  • Use of multiple year data

  • Losses

  • The effect of government policies

  • Intentional set-offs

  • Use of customs valuations

  • Use of transfer pricing methods


Establishing comparability adjustment for material differences

Establishing Comparability, Adjustment for material differences

For establishing comparability, 10 steps of search process are essential to follow:

Step 1: Broad based analysis (e.g. industry analysis, analysis of value drivers…)

Step 2: Determination of years to be covered

Step 3: Review of the controlled transaction(s) in order to identify the relevant factors that will influence both the selection of the appropriate transfer pricing method(s) and the comparability analysis

Step 4:Review of existing internal comparable. Where necessary, decision to look for external ones.

Step 5:Determination of available sources of information (including, but not limited to, commercial databases) and of their reliability


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Step 6: Selection of the relevant transfer pricing method(s) and definition of the relevant indicia (e.g. what net margin indicator in case of a TNMM).

Step 7: Identification of potential comparables: defining the key characteristics to be met by any uncontrolled transactions to be potentially comparable, on the basis of the relevant factors identified under step 3 and in accordance with the comparability standard established under paragraphs 1.19 to 1.35 of the TP Guidelines

Step 8: Determination of and making comparability adjustments, where and as needed (comparison of taxpayer’s profits with profits which would have accrued at arm’s Length)

Step 9: Interpretation and use of data, determination of the arm’s length remuneration.

Step 10: Implement support process. Install review process to ensure adjustment for material changes and document these processes


Selection of most appropriate method

Selection of most appropriate method

  • The Regulations identify five transfer-pricing methods;

    1. COMPARABLE UNCONTROLLED PRICE (‘CUP’) METHOD

    2. RESALE PRICE METHOD

    3. COST PRICE METHOD,

    4. PROFIT SPILT METHOD

    5. TRANSACTIONAL NET MARGIN METHOD

  • Section 92C read with RULE 10C provides no priority of methods. Rather, the selection of the pricing method to be used to test the arm’s length character of a controlled transaction must be made under the “MOST APPROPRIATE/ BEST METHOD RULE”.


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

  • The ‘best method’ is that method which, under the facts and circumstances of the transaction under review, provides the most reliable measure of an arm’s length result.

  • Completeness and accuracy of data, reliability of assumption and the sensitivity of the results for possible deficiencies in the data/ assumptions are some of the key factors to be kept in mind while determining and documenting the most appropriate method.


Determination of alp

Determination of ALP

  • The Indian Regulations, which have to a great extent have been adopted from OECD Guidelines, require that income arising from international transactions between ‘associated enterprises’ be computed having regard to the arm’s length price.

  • Compliance with the arm’s length principle can be established by showing that the conditions of the controlled transaction are consistent with those actually made in comparable transactions between independent enterprises under comparable circumstances ( ‘comparable uncontrolled transactions’).


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Steps involved in the determination of the arm’s length price can be summarized as Follows:

  • Identification of the “international transaction”;

  • Identification of an “uncontrolled transaction” – Rule 10A (a);

  • Identification and comparison of specific characteristics embodied in international transactions and uncontrolled transactions – Rule 10B (2);

  • Finding out whether uncontrolled transactions and international transactions can be compared by reconciling/resolving differences, if any – Rule 10B (3);

  • Ascertaining the most appropriate method by applying the tests laid down – Rule 10C;

  • Determination of the arm’s length price by applying the method chosen – Rule 10B (1).

  • Section 92C (1) stipulates that the arm’s length price is to be determined by adopting the most appropriate method.


Adjustments and documentation

Adjustments and Documentation

  • The documentation should provide the quantitative and qualitative screening performed on the external comparable to determine whether the same could be considered comparable to the international transaction and making appropriate adjustments to ensure closer comparability between uncontrolled and controlled transactions

  • The documentation should include the adjustments that are required to achieve closer comparability between uncontrolled and controlled transactions (e.g. adjustments on account of differential credit period, geographical differences, non- recurring expenditure like substantial advertising expenditure incurred by the assesse as compared to the comparable, etc.


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

  • The documentation should also include the procedure adopted, by which the above adjustments were made.

  • To summarise, the documentation for selecting the MAM should highlight the through appraisal done of all facts and circumstances pertaining to the international transaction and the method selected.

    Report Filling

  • At the end, Transfer pricing study report is prepared with reference to section 92D read together with Rule 10D (1) of the Income Tax Rules, 1962]


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Audit Report under Form 3CEB

  • All assessees entering into international transactions required to furnish a report from an accountant on or before the specified date in Form 3 CEB.

  • Form 3CEB prescribed (Rule 10E)

    • Declaration by the accountant about examination of accounts and records of assessee to review international transactions

    • Opinion as to whether proper information and documents prescribed by Rule 10D are maintained by the assessee

    • Opinion whether particulars given in Annexure to Form 3CEB are true and correct

  • Guidance note issued by the ICAI for its members gives more significance to Management Representations


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Powers of Assessing Officers

  • May require any person who has entered into an international transaction to furnish any information or documents in respect thereof.

  • May make adjustments to the transfer price in following circumstances:

    • Price charged is not in accordance with the methods.

    • Prescribed documentation not maintained in accordance with the provisions of the Act / Rules.

    • Unreliable data used in computing ALP.

    • Assessee failed to furnish required information or documents within the specified time.

  • May also make a reference to the Transfer Pricing Officer if the AO feels necessary & expedient so to do – but with prior approval of Commissioner


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Impact of Adjustments by AO

  • Before making any adjustments ‘principle of natural justice’ to be followed i.e. assessee shall be given an opportunity of being heard.

  • Impact of Adjustments:

    • Recomputation of the total income of the assessee having regard to ALP determined by AO.

    • Denial of deduction under s. 10A / 10B or Chapter VI-A, in respect of such enhanced income

    • Other AEs income not to be recomputed on the basis of recomputation of income of one enterprise

    • Levy of penalty ranging from 100% to 300% of tax on the enhanced income u/s 271(1)(c).


Transfer pricing in india ca hiren d shah ahmedabad hirenindia hotmail

Section

Default

Penalty

271 AA

Failure to keep and maintain transfer pricing documentation and information.

Sum equal to 2% of the value of international transaction.

271 BA

Failure to furnish Transfer Pricing Audit Report from an Accountant

One lac rupees

271 G

Failure in furnishing transfer pricing documents and information to tax authorities upon request.

Sum equal to 2% of the value of international transaction.

Penalties under TP Regulations


Ca hiren d shah ahmedabad email hirenindia@hotmail com

CA Hiren D Shah

Ahmedabad

Email : [email protected]

Advance Pricing Arrangement - APA


Definition of apa

Definition of APA

  • APA – An agreement between the Board and the Tax payer

  • Determines, in advance, ALP or Specifies the manner of determination of ALP or both

  • ALP could be one of methods prescribed under TPR or any other method with necessary adjustments or variations

  • ALP cannot be deviate for the period specified in the APA

  • Maximum validity is 5 consecutive years


Types of apa

Types of APA

  • Unilateral APA

    • Entered into between Board and Tax Payer (Involve One Country)

  • Bilateral APA

    • Entered into between Board and Tax Payer, subsequent to and based on the agreement between CA of two nation (Involve Two Country)

  • Multilateral APA

    • Entered into between Board and Tax Payer, subsequent to and based on the agreement between CA of more than two nation (Involve Two Countries)


Stakeholders

Stakeholders

  • Applicant ( Tax Payer)

  • Board ( CBDT)

  • Central Government ( Approval)

  • Competent Authority ( Joint Secretary (FT&TR-I), Ministry of Finance

  • APA Team ( Board including experts in economics, statistic, law or any other field as may be nominated)

  • For unilateral APAs, the DGIT

  • For Bilateral/multilateral APAs, the Competent Authority of India


Apa process

APA Process

  • Phase – I – Pre-filing application/constitution

  • Phase – II – APA Application

  • Phase – III –Evaluation and Negotiation stage

  • Phase – IV- Finalisation of APA

  • Phase – V – Post of APA requirements


Phase i pre filing consultation

Phase – I Pre-filing Consultation

Pre-filing Consultation

Determining the scope of an agreement, issues,

Pre-filing

Application

  • In Form No 3CEC

  • Particulars of applicant including details of Authorised representative, Global structure, Particulars of AE, Prior 3 years’ overview of an operation, Functional and Risk Profile, Covered International transactions, Value of covered under TP audits for prior 3 years, type and duration of proposed APA, Proposed TP methodology, Identification of third party comparable, Details of ALP, PLI, Critical Assumptions, History of TP Audit/ Assessment and Appeals, Agreement with AE, Reasons for covering international transactions in APA


Pre filing consultation conferences

Pre-filing consultation/ conferences

  • Objective of Pre-filing consultation :

    • Determine the scope of the agreement

    • Identify of transfer pricing issues

    • Determine the suitability of international transaction for the agreement

    • Discuss broad terms of the agreement

    • Pre-consultation is mandatory and shall not bind the Board or the taxpayer to enter into an agreement and shall not be deemed to mean that the taxpayer has applied for entering into an agreement


Phase ii apa application

Phase – II APA Application

  • After pre-filing, tax payer desirous for applying an APA shall make an application for an APA in Form 3CED to –

    • DGIT - Unilateral APA

    • Competent Authority – Bilateral / multilateral APA

  • Time Limit for filing APA

    • Continuing Nature International Transactions

      • First Day of the previous year

    • New International Transactions

      • Before Undertaking such International Transactions


Particulars of an apa application form 3ced

Particulars of an APA application [Form 3CED]

  • General

  • Functional Analysis

  • Industry and market Analysis

  • Transfer Pricing background

  • TRM Analysis

  • If the application is furnished for unilateral APA with Treaty Country, an explanation for not entering into bilateral/multilateral APA to be provided

  • In case of bilateral/multilateral APAs, evidence for furnishing APA application with the other CA should be enclosed


Compliance during apa process

Compliance during APA Process

  • During the period when APA is being negotiated, the tax payer would require to undertake the annual transfer pricing compliances and Income tax return filing in the regular manner.

  • Once an agreement is reached, the tax payer would be required to file modified return ( for the covered years those have elapsed) within 3 months from the end of the month in which the agreement is entered into.

  • In case the assessment of the year under APA is completed or pending, the same has to be completed in consonance with the APA.


Phase iii evaluation and negotiation stage

Phase – III – Evaluation and Negotiation stage

  • Communicate deficiency within 30 days

  • Remove defect within 15 days from the date of communication

  • If defect not removed, an opportunity to be given by DGIT/CA

  • If not attended, application shall not be allowed and fees shall be refunded


Consultation discussion

Consultation & Discussion

  • The Process of bilateral / multilateral APA shall not be initiated unless the AE(s) situated outside India has initiated process of APA with the CA in the other Country.

  • Once APA filed with CA – India, they forward the copy to DGIT which in turn will forward to APA Team

  • APA Team ( Unilateral APA), APA Team and CA ( Bilateral/multilateral APA) would conduct the main processing of an application by :

    • Holding meetings with the applicant

    • Calling for additional documents/ information/ material from the applicant

    • Visiting, applicants’ business premises; and/or

    • Making inquiries as may be deemed fit


Apa report

APA Report

  • APA team shall carry out the enquiry and prepare a draft report which shall be forwarded by DGIT to the Competent authority. CA shall enter into negotiation with the CA of the other Country to reach an acceptable set of terms

  • If CA of the other Country does not accept the terms, it shall be informed to the applicant.

  • Applicant cannot be the part of the CA – India and CA- Other Country

  • Applicant can meet the CA in India


Phase iv finalization of apa

Phase – IV – Finalization of APA

APA entered into between the Board and the applicant

Mutually agreed draft APA prepare

  • APA Would include the following points:

    • International transaction covered

    • Agreed transfer pricing methodology

    • Determination of ALP

    • Definition of relevant terms

    • Critical assumption

    • Other conditions, if any other than provided in the Act or in the Rules

    • Agreement shall not be binding on the Board or the applicant if there is any change in any of the critical assumptions or failure to meet conditions subject to which the agreement has been entered into

    • Transition period shall be governed by Chapter X [ filing APA to entering into an agreement]


Phase v post apa requirement

Phase – V – Post APA requirement

  • Filing Annual Compliance report to DGIT in Form no 3CEF

  • Within 30 days from the due date of report or within 90 days from the date of entering into the agreement, whichever is later

  • DGIT shall send one copy of report to CA, CIT and TPO having jurisdiction

  • Shall include:

    • Particulars of the tax payer, Type of APA entered into, Details of covered transactions, Changes in the business model, function and risk profile, variation in the agreed critical assumptions and reasons, changes in the terms and conditions


Annual compliance audit

Annual Compliance Audit

  • Shall be carried out by TPO who shall furnish report within 6 months to DGIT and CA from the end of month in which the annual compliance report is received

  • Regular TP audit shall not be undertaken by TPO for transaction not covered under APA

  • TPO may require applicant to substantiate :

    • Compliance with the terms of the agreement

    • Satisfaction of critical assumptions

    • Correctness of supporting data/information

    • Consistency of application of the TPM


Amendments in application

Amendments in Application

  • Withdrawal of APA ( Form No 3CEE)

  • Revision of APA

    • Either suomotu or on request of the applicant/DGIT/CA in India when :

    • Change in critical assumption

    • Failure to meet condition subject to which Agreement has been entered into

    • Change in law

    • Request from CA of other country

  • Cancellation of APA

    • Failure of the taxpayer to comply with the terms of the agreement

    • Failure to file the annual compliance report

    • Annual compliance report contains material errors

    • Tax payer doe not agree with the revision of the APA

  • Renewing an agreement

    • As a new application for the agreement except pre-filing


Key consideration of apa into india

Key Consideration of APA into India

  • BAPA/ MAPA are not achievable where –

    • There is no provision in the domestic law of the other country to enter into APAs or

    • The respective countries do not have tax DTAA with each other [ e.g. India – HongKong]

  • Critical Assumptions are not elaborated in the APA rules. Critical assumptions should be articulated well and should be set in a broad manner so as to ensure that every small change in the facts should not lead to cancellation or revision of an APA


Few examples of critical assumptions

Few Examples of Critical Assumptions..

  • Operational

  • Legal

  • Tax

  • Financial

  • Accounting

  • Economic


Key consideration of apa in india

Key Consideration of APA in India

  • Powers of the Board

  • Competence/ capability of the APA team

  • Timelines

  • Compliance Audit


Apa v tp audit

APA v. TP Audit

  • Various factors need to be considered while choosing between seeking APA and waiting for/anticipating a TP Audit

    • Cost

    • Certainty

    • Confidentiality

    • Capability

    • Principled and Co-operative attitude of the tax administration

    • Co-operation/ Information flow from AEs


Advantages of apas

Advantages of APAs

  • Certainty

  • Reduced Documentation burden

  • Time and Cost saving

  • Preferred by Tax Authorities

  • Reduces risk of double taxation

  • Mandatory pre-filing

  • Unilateral can be pursued in case bilateral fails

  • Conjunctive relationship with the tax authorities

  • APA can be guide to the past litigation

  • APA process is able to resolve transfer pricing issues early on in a more efficient, consistent and comprehensive manner than the Standard Audits, appeals and litigation processing which are more of adjudication processes.


Disadvantage of apas

Disadvantage of APAs

  • High – upfront Cost

  • Time frame

  • Pre-filing forms is too much technical

  • Onerous details required in pre-filing / APA Application

  • No Rollback provisions [APA in resolving open years]

  • Annual compliance Audit

  • Impact of the past litigation

  • Inadequate infrastructure

  • Wide Powers of the Board


Way forward

Way Forward……

  • Introduction is a positive move towards bringing in a progressive dispute resolution mechanism

  • Its success depends upon

    • How efficiently and expeditiously it is executed

    • Its practical effectiveness

    • Confidentiality of the tax payers

    • Flexible approach of tax authorities

    • Technical competence of APA team

    • Competence and capabilities of the consultants/representatives

    • Process should be fair and transparent

    • Pre-filing application on anonymous basis is likely to give adequate comfort to the tax payers


Safe harbour rules

Safe Harbour Rules


Background1

Background

  • Since the Inception of transfer pricing, the number of cases identified for audit and the transfer pricing adjustments locked up in disputes have increased

  • In order to reduce the number of transfer pricing audits and prolonged disputes, new Section 92CB has been inserted to provide that the determination of ALP u/s 92C or 92CA shall be subject to safe harbour rules.

  • Clause 124(22) of DTC “ Safe Harbour” in relation to computation of arms’ length price means circumstances in which the income tax authorities shall accept the transfer price declared by the assessee.


Safe harbor regime in india

Safe Harbor Regime in India

  • Finance [ No 2 ] Act, 2009 introduced new section 92CB

    • The determination of arm’s length price under Section 92C or section 92CA shall be subject to safe harbor rules

    • The Board may, for the purposes of sub-section (1), make rules for safe harbor.

  • Intention is to reduce tax disputes


Introduction to safe harbor rules

Introduction to Safe Harbor rules

  • Considering the increase in transfer pricing litigation, Central Board of Direct Taxes (CBDT) is to formulate safe harbour rules.

  • Aim to reduce the impact of judgemental errors in transfer pricing.

  • Safe harbour has been defined to mean ‘circumstances’ in which the revenue authorities shall accept transfer pricing declared by the tax payer.

    Internationally safe harbour has taken various forms

  • Exclusion of certain classes of transactions based on quantitative thresholds.

  • Stipulations of margins/pricing norms for specified industries/functions (USA, Singapore)

  • Specifying thresholds whereby the onerous documentation requirement is reduced (Brazil)


What is safe harbor

What is Safe Harbor?

  • Evolution of Safe harbour provisions

    • OECD Committed on Fiscal affairs debated the concept in 1993.

    • Task force recommended safe harbor for small businesses.

    • US Regulations in 1960’s brought in 5 methods + unspecified methods

  • Definition of a Safe harbor

    A Safe harbour (referred to as a comfort mechanism in the OECD Guidelines) has been defined to mean ‘circumstances’ in which, the Indian Revenue Authorities shall accept the transfer pricing declared by the tax payer.

  • Administrative requirements may vary from

    • Total relief to targeted tax payers from Transfer Pricing regulations; to

    • Obligation to comply with various procedural rules as a condition for qualifying for safe harbour.


Factors supporting use of safe harbor

Factors Supporting use of Safe Harbor

  • Compliance Relief

    • Collection and Analysis of Data

    • Application of simplified method (instead of Best Method)

    • Relief from search of comparables

  • Certainty

    • Prices will be accepted by Tax Authorities

    • Qualified Taxpayers assured that they will not be subject to Audit

  • Administrative Simplicity

    • Once eligibility is established, minimal examination of controlled transactions.

    • Tax administrator can allocate more resources to examination of transactions and taxpayers.


Problems presented by use of safe harbors

Problems presented by use of Safe Harbors

  • Safe harbor may not be consistent with the Arm’s Length principle as it will be broad based.

  • As per Clause 124(22) “ Safe Harbour” in relation to computation of ALP means, circumstances in which the income – tax authorities shall accept the TP declared by the assessee. It gives a rise to Tax planning opportunities

  • Risk of Double Taxation in other jurisdiction

  • Mutual Agreement Procedure (MAP) Difficulties


Thank you

THANK YOU


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