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Advance pricing agreements
2 / 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.
► The Rules notified by the Central Board of Direct Taxes provide detailed guidelines on the process to be followed.
► 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.
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.
3 / Advance pricing agreements
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.
► Such an ACR may be subject to scrutiny by the Indian Revenue Authority.
► Where APA exists, the regular audit of covered transactions would not be undertaken by the Indian Revenue Authority.
► 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.
► 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.
► 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
► Where the size and complexity of international transactions assumes
significant magnitude
► When approach applied/method used is likely to face stiff opposition from the
Indian Revenue Authority
► 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
High Court
Appellate
Tribunal
Commissioner
(Appeals)
Assessing
Officer
Tra
dit
ion
al a
ve
nu
es Non
Traditional
Avenues
Authority of
Advance Ruling
(AAR)
Mutual
Agreement Procedure
(MAP)
Dispute
Resolution Panel (DRP)
National Tax
Tribunal (To be notified)
Supreme
Court or High Court
Advance
Pricing Agreements
4 / Advance pricing agreements
Some areas of prolific transfer pricing disputes where APA would be useful
► Captive intra-group services
► Agency services or commission agents
► Procurement services and sales support services
► Limited risk distributors
► Payments for use in intellectual property
► Business restructuring transactions
► Allocation of headquarter and management fee
► Financial transactions such as loans and guarantees
► Sales supply chain structures
► Low-margin companies with significant inter-company transactions
► Contract manufacturing
► Commodity trading
► 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.
5 / Advance pricing agreements
In the world of APAs, experience matters
► 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.
► 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.
The EY advantage
Leaders in
APA
We have
negotiated 800+
APAs globally
across 20+
countries
► We pioneered the APA process, having
conducted the first APA globally in 1990.
► 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).
Our global
network of
transfer
pricing
advisors
1,500+ transfer
pricing
professionals
spanning 50
countries
► 400+ people in 11 countries in the Americas
► 270+ people in 13 countries in Asia Pacific
► 270+ people in 26 countries in Europe, the
Middle East, Africa
► 100+ transfer pricing partners, principals
and directors globally
Tax authority
insights
Global transfer
pricing group
includes former
senior tax officials
of 20+ countries
► Six countries in the Americas (Argentina,
Brazil, Ecuador, Mexico, the US, Venezuela)
► Five countries tax authorities in Asia Pacific
(China, India, Indonesia, Japan, New
Zealand)
► Twelve countries in Europe, the Middle East,
Africa (Belgium, Denmark, Finland, Hungary,
Israel, the Netherlands, S. Africa, Spain,
Sweden, Switzerland, Turkey, the UK)
The India
transfer
pricing team
More than 220
transfer pricing
professionals
across the country
► The Transfer Pricing team consists of people
from diverse academic and professional
backgrounds such as accountants,
economists, management graduates and
lawyers.
► It has more than 30 transfer pricing
partners, associate directors, senior
managers and managers.
► 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.
Our global
network of
transfer
pricing
advisors
1,500+ transfer
pricing
professionals
across 50
countries
► 400+ people in 11 countries in the Americas
► 270+ people in 13 countries in Asia Pacific
► 270+ people in 26 countries in Europe, the
Middle East, Africa
► 100+ transfer pricing partners, principals
and directors globally
6 / Advance pricing agreements
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
► Our team has experience of innumerable proceedings before Authority for Advance Rulings, Tribunals, High Courts
and Supreme Court
► With pan-India coverage, our senior professionals/advisors are widely recognized before judicial forums in the
country
► 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
► 375 + matters handled before the ITAT between July 2009 and May
2012 across locations and 6 matters before the Special Bench
► More than 90% success rate
► More than 60% appeals related to international tax and transfer pricing
matters
► Represented 6 matters before the special bench
► Majority appeals handled by our senior litigation professionals
Matters handled before the
Dispute Resolution Panel
► Leaders with 33% (175 cases in FY11–12) market share in the western
region (predominantly handled by senior litigation professionals)
► Handled 20% of the matters in Delhi/NCR region and 18% market share in
the southern region
► Several successful orders despite a general negative view taken by the
DRP across the country
Matters handled before the
Authority for Advance Ruling
► 70% share in matters disposed before AAR in FY11–12
► More than 60% matters represented by senior EY professionals
independently
7 / Advance pricing agreements
Our Indian transfer pricing litigation professionals
Vijay Iyer
► 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).
► 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).
► 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.
Ameet Kapoor
► 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.
► 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.
Rajan Vora
► 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.
► 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.
Ganesh Raj
► Ganesh is a Partner with EY’s Tax practice and is also the industry leader for the aerospace
and defence sector.
► 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.
► His functional experience includes corporate tax planning, structuring cross-border
investments and transactions, and joint venture negotiations.
MP Lohia
► 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.
► 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.
► He appears regularly before DRP and Appellate forums including ITAT.
Sharat Chandra
► Sharat Chandra is a Senior Advisor with EY and is based in New Delhi.
► 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.
8 / Advance pricing agreements
Our global virtual APA team
Monique Van
Herksen
► 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.
► Based in Amsterdam, Monique has extensive experience in cross-border dispute resolution,
including mutual agreement procedures and arbitration.
► 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.
David Canale
► David Canale is Ernst & Young LLP’s US Director of Transfer Pricing Controversy Services.
► 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.
► David’s combined Internal Revenue Service (IRS) and private practice APA and MAP
experience includes more than 100 cases.
► 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.
► He also developed strategies and coordinated with the US competent authority regarding
negotiations with various treaty partners.
John Hobster
► 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.
► Prior to joining EY, John was the former Investigation Manager and Competent Authority
within the UK Inland Revenue Transfer Pricing Division.
► 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.
► 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.
Bob Ackerman
► 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.
► 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).
9 / Advance pricing agreements
Our global virtual APA team
E Miller
Williams Jr.
► E. Miller Williams Jr. is Ernst & Young LLP’s Transfer Pricing Controversy leader in the
Southeast Sub-Area of the US.
► 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.
► 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.
► 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.
Tetsuya Bessho
► Tetsuya Bessho has considerable experience in transfer pricing in the areas of
documentation, planning, controversy, APAs, and audit resolution including competent
authority matters.
► 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.
► 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.
► 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.
10 / Advance pricing agreements
Notes
11 / Advance pricing agreements
Vijay Iyer
Tel: +91 11 4363 3240
New Delhi, Kolkata, Chandigarh
Aashish Kasad
Tel: +91 22 6192 0630
Mumbai
Anuj Khorana
Tel: +91 124 671 4906
Noida/Gurgaon
Hitesh Sharma
Tel: +91 22 6192 0620
Mumbai
Chetan Rajput
Tel: +91 20 6603 6024
Pune
Jayesh Sanghvi
Tel: +91 40 6736 2078
Hyderabad
Keyur Shah
Tel: +91 22 6192 0970
Mumbai
N Madhan
Tel: +91 44 6654 8568
Chennai
Keval Doshi
Tel: +91 22 6192 0650
Mumbai
Paresh Parekh
Tel: +91 22 6192 1342
Mumbai
Rajendra Nayak
Tel: +91 8067275454
Bengaluru, Kochi
Sanjay Kapadia
Tel: +91 22 6192 0880
Mumbai
Dhinal Shah
Tel: +91 79 6608 3850
Ahmedabad
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