{"id":1650,"date":"2013-10-21T09:32:49","date_gmt":"2013-10-21T04:02:49","guid":{"rendered":"http:\/\/www.itatonline.org\/articles_new\/?p=1650"},"modified":"2013-10-21T09:33:31","modified_gmt":"2013-10-21T04:03:31","slug":"transfer-pricing-the-law-and-practice-of-advance-pricing-agreements-apa","status":"publish","type":"post","link":"https:\/\/itatonline.org\/articles_new\/transfer-pricing-the-law-and-practice-of-advance-pricing-agreements-apa\/","title":{"rendered":"Transfer Pricing: The Law And Practice Of Advance Pricing Agreements (APA)"},"content":{"rendered":"<div class=\"articleblogheader\">\n<div class=\"articlepicture2\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.itatonline.org\/articles_new\/wp-content\/uploads\/2013\/10\/Anurag_Soan_Shreya_Ganju.jpg\" alt=\"Anurag Soan + Shreya Ganju\" width=\"150\" height=\"100\" \/><\/div>\n<p>Transfer Pricing: The Law &#038; Practice Of Advance Pricing Agreements<\/p>\n<p>    Anurag Soan &#038; Shreya Ganju, Symbiosis Law School, Pune<br \/>\n The <a href=\"https:\/\/www.itatonline.org\/info\/index.php\/cbdt-releases-transfer-pricing-advance-pricing-agreement-scheme-apa\/\">Advance Pricing Agreement Scheme<\/a> (APA), which was notified on 30.08.2013, presents a steep learning curve for the taxpayers and the revenue though it has been in operation in other countries for several years. The authors have, after deep study of the Indian law and that prevailing in other Countries, identified all the complexities in the Scheme and suggested measures to resolve them\n<\/div>\n<div class=\"chandrika\">\n<div align=\"right\"><span class=\"journal2\"><a href=\"https:\/\/www.itatonline.org\/articles_new\/index.php\/transfer-pricing-the-law-and-practice-of-advance-pricing-agreements-apa\/#link\">Link to download this article in pdf format is at the bottom<\/a><\/span><\/div>\n<\/p>\n<p>\n<\/p>\n<p><strong>Introduction<\/strong>\n<\/p>\n<p>  Taxation is a concept which is based on the sovereignty of  nations, whereby each nation taxes income derived from businesses within its  sovereign control. Universally, the world recognises each nation&rsquo;s right to tax  the economic activity within its jurisdiction.1 International issues  are addressed, to some extent, through a number of bilateral treaties, many  based on an international model2 or convention, mutual  understandings, and practice. Taxation of international transactions by  individual nations often results in confusion, disagreement, double or multiple  taxation of same income,3 and, also taxable income which is not  taxed by any of the nations. Concurrently, the fragmentation of taxation of  international transactions into a number of national systems provides a  significant opportunity to business entities for tax avoidance, evasion, or  mistake.4<\/p>\n<\/div>\n<p><!--more--> <\/p>\n<div class=\"chandrika\">\n<div align=\"center\">\n<div class=\"\"><\/div>\n<\/div>\n<p>  The world&rsquo;s taxing authorities are worried about  multinational corporations using intercompany transactions to shift earnings  among subsidiaries to avoid taxation.5 Similarly, corporations have  been concerned about double taxation that is, paying taxes on the same income  to two or more countries.6 <\/p>\n<div class=\"amazonright\">\n<p><iframe src=\"https:\/\/ws-in.amazon-adsystem.com\/widgets\/q?t=itatonlineorg-21&#038;o=31&#038;p=8&#038;l=as1&#038;asins=9351290433&#038;ref=tf_til&#038;fc1=000000&#038;IS2=1&#038;lt1=_blank&#038;m=amazon&#038;lc1=0000FF&#038;bc1=000000&#038;bg1=FFFFFF&#038;f=ifr&#038;MarketPlace=IN&#038;ServiceVersion=20070822&#038;WS=1&#038;ID=8042_ProductLink&#038;Operation=GetProductLink&#038;\" style=\"width:120px;height:240px;\" scrolling=\"no\" marginwidth=\"0\" marginheight=\"0\" frameborder=\"0\"><\/iframe> <\/div>\n<p>Transfer pricing is the term used to describe the methods  by which multinational taxpayers account for transactions among subsidiaries  and divisions in different countries.7 Tax authorities want these  companies to transact at an ALP. All over the world, transfer pricing is  considered as a very significant issue which requires thorough examination,  documentation and indepth understanding of tax rules prevailing in different  countries and international organisations like OECD. Around 60 per cent of  global trade is between companies in the same group. The current transfer  pricing regime in India8 is heavily burdened by litigation between  MNC&rsquo;s and Tax Authorities. The primary cause of litigation is due to  determination and uncertainty of the ALP9 in international  transactions. When tax authorities do not agree with a company&rsquo;s ALP, they  &lsquo;adjust&rsquo; the price. If the company disagrees with the &lsquo;adjustment,&rsquo; it can  appeal the decision. The company can also approach a high court to resolve the  dispute. <\/p>\n<p>  In the recent past Income tax disputes for both tax  authorities and taxpayers have been proved as a reason of distress. On comparing  the data of March 31, 2009, and March 31, 2011, the amount involved in tax  disputes almost doubled to Rs.  4.05 trillion. That amount is so huge that it is enough to cover the  government&rsquo;s subsidies for two years. It is a fact that transfer pricing is the  single-largest cause of litigation for both foreign and Indian multinational  companies. According to Ernst &amp; Young the estimated outstanding amount  adjusted by tax authorities in transfer pricing cases is around `  1 trillion. According to Pricewaterhousecoopers (Pwc) almost all adjustments lead to litigation.10 In 2011, PwC  estimated that 70 per cent of outstanding transfer pricing disputes in the  world originated in India and in the last five years, approximately 500  transfer pricing cases have been decided by Indian tribunals. The Indian  government took various measures like Dispute Resolution Panel,11  Safe Harbour12 and Mutual Agreement Procedure13 (MAP) but  these methods failed to solve the increasing litigation between corporate and  tax authorities.<\/p>\n<p>  As an initiative to reduce the TP litigation in India the  advance pricing agreement (APA)14 was introduced15, in  exercise of powers conferred under Section 92CC(9) of the IT Act, 1961 read  with Section 295, the CBDT amended the Income Tax Rules. In furtherance of this  amendment Rule 10F to 10T and Rule 44GA are inserted for the purpose of  international transactions.<\/p>\n<p>  APA is an agreement16 between the board and the  taxpayer, which determines in advance, the Arm&rsquo;s Length Price or specifies the  manner in which Arms Length Price is to be determined, in relation to an  international transaction.17<\/p>\n<div class=\"amazon\">\n<p><iframe src=\"https:\/\/ws-in.amazon-adsystem.com\/widgets\/q?t=itatonlineorg-21&#038;o=31&#038;p=8&#038;l=as1&#038;asins=9351290778&#038;ref=tf_til&#038;fc1=000000&#038;IS2=1&#038;lt1=_blank&#038;m=amazon&#038;lc1=0000FF&#038;bc1=000000&#038;bg1=FFFFFF&#038;f=ifr&#038;MarketPlace=IN&#038;ServiceVersion=20070822&#038;WS=1&#038;ID=8042_ProductLink&#038;Operation=GetProductLink&#038;\" style=\"width:120px;height:240px;\" scrolling=\"no\" marginwidth=\"0\" marginheight=\"0\" frameborder=\"0\"><\/iframe> <\/div>\n<p>The driving force for introducing an APA is that it  delivers certainty and accuracy, for both the taxpayer and the tax authorities,  of the tax liability of the taxpayer&rsquo;s international transactions. A taxpayer  by agreeing in advance to the ALP methodology to apply to the international  transactions18 covered by the APA eliminates the prospects of  arbitrary tax adjustments by tax authorities. An APA removes an audit threat  and delivers a particular tax outcome based on the terms of the agreement, and  substantially reduces compliance costs. This enables a more efficient and  effective management of transfer pricing compliance requirements by bringing  fairness, simplicity and efficiency, which may otherwise lead to protracted and  disputed dealings between a taxpayer and the tax authorities, including  difficulties involved in resolving economic double taxation.<\/p>\n<p>  Thus, for a taxpayer, an APA can be an effective tool for  better managing the tax risks arising from international transactions. An APA  can similarly be an effective tool for better and more efficient administration  of the transfer pricing laws. Consequently, APAs provide a win-win situation  for all the parties involved.<\/p>\n<p>   <strong>Indian  APA Regime &#8211; Analysis of section 92CC 92CD and Rules<\/strong><\/p>\n<p>  <em> &ldquo;An APA  is an arrangement that determines, in advance of controlled transactions, an  appropriate set of criteria for the determination of the transfer pricing for  those transactions over a fixed period of time&rdquo;.<\/em><\/p>\n<p>  &#8211; OECD in its 2010  transfer pricing guidelines<\/p>\n<h2>1. Parties to the  Contract<br \/>\n  <\/h2>\n<\/p>\n<p>   In India  the APA programme is governed by sections 92CC, 92 CD of IT Act read with Rules  10F to 10T. According to section 92CC (1) of IT Act, the APA will be entered  between taxpayer19 and board20 with the prior permission  of the central government. Currently, no monetary limit has been prescribed  regarding the eligibility and any person is eligible to enter into the  agreement who is indulged in an international transaction or contemplating any  international transaction. Once the APA comes into force there will not be any  adjustments or penalties if taxpayer applies the agreed transfer pricing  methodology. <\/p>\n<p>   The  taxpayer can enter into 3 types of APA namely Unilateral21 APA, BAPA22  and MAPA. A unilateral APA is an agreement which is solely between a taxpayer  and a tax authority. When single mutual agreement takes place between the CA of  two tax administrations then it is called BAPA. When More than one bilateral  mutual agreement is present then it is called MAPA.<\/p>\n<p>   A party  interested in entering into APA needs to go through mandatory pre- filing23  consultation24 which is not binding on the Board or the Taxpayer.  Since the taxpayer is required to reveal important and confidential information  during this process, an option of anonymous pre-filing consultation is  permitted. Pre-filing process basically aids in determining the feasibility of  APA and identify the transfer pricing issues. Pre filing gives an opportunity  to both the parties to discuss broad terms of the agreement in detail. Taxpayer  is expected to be effectively involved in regular communication with its  associated enterprises, ensuring effective information flow to tax authorities.  APA programmes require the taxpayer to be prepared for attending meetings  between officials and to provide any information whenever required. Once the  pre-filing is done then the taxpayer can move ahead with the APA application.25  In case of continuing transactions the application is to be filed before the  1st day of the relevant previous year. In case of remaining transactions the  application can be filed at any time before undertaking the transaction.<\/p>\n<h2>2. Arms&rsquo; Length  Price (ALP)<br \/>\n   <\/h2>\n<\/p>\n<p>   The term  &ldquo;Arm&rsquo;s Length Price&rdquo; can be defined as &ldquo;the price at which a buyer would be  willing to buy \/avail and a seller would be willing to sell\/render a  product\/service, and where both the transacting parties are not related to one  another and the said transaction is free of all\/any perceivable conflict of interest&rdquo;.26  The provisions pertaining to the Arm&rsquo;s Length Price were embedded27  under section 92 of the Act. The Indian tax authority is motivated to follow  the procedures laid down in articles28 of OECD and UN Model Tax  Convention.<\/p>\n<p>   The major  cause of TP litigation is non adjustment of the ALP between taxpayer and CA. It  can be explained through the following example: <\/p>\n<p>   Suppose  India tax authorities have found that the international transaction is not at  Arm&rsquo;s Length and subsequently they proceed to make an adjustment. At this point  it may lead to double taxation of the taxpayers income in respect of which  adjustment is done because the adjusted income might have already offered for  tax in some other country and will now again be subjected to be taxed by Indian  tax authorities. Similar situation occurs if foreign tax authorities do not  accept the transfer price and make an adjustment. If there is certainty about  the transfer price being accepted in both the jurisdictions, the risk of double  taxation is eliminated. This is precisely what APA aims for. APA entered  between both the jurisdictions and tax-payers provide certainty to a great  extent that the transfer price will be accepted and thus the risk of double  taxation is eliminated.<\/p>\n<p>   Section  92CC(2) specifies that the ALP may be determined by any of the 5 methods  prescribed u\/s. 92C(1). The other benefit of resorting to an APA is that the  taxpayer and tax authority may agree to a methodology29 other than  the prescribed methods for determining the ALP, depending upon the commercial  nature of the international transaction. This may be quite useful in scenarios  where transfer price is set with pure commercial rationale. Tax-payer can  negotiate an economic method to justify the set transfer price.<\/p>\n<p>   The pre-filing process acts as a key player in  determining the appropriate TP method. Pre-filing helps in discussion of TPM,  methods, policies, and practices used by the applicant and AE in the past. Also  there is analysis and discussions of each TPM, applied or rejected, for each  covered transaction. It provides information on accepted or rejected internal  comparables. On the basis of such discussions the final TPM is suggested on  which APA will be executed.<\/p>\n<h2>3. Cost and Time  Analysis<br \/>\n   <\/h2>\n<\/p>\n<p>   Section  92CC(4) prescribes that an APA can be entered for maximum period of 5 years.  However the act is silent on minimum duration of an APA. The reason behind such  a long period of agreement is justified as APA is a time consuming and resource  exhausting method as compared to regular transfer pricing method. In  jurisdictions like Japan and USA MAPA it takes a minimum of 14 months and may  extend up to 3 years to conclude a unilateral APA. BAPA and MAPA, usually takes  even longer because of the level of complexity just by virtue of having more  than two tax jurisdictions involved.<\/p>\n<h2>4. Binding Nature  of Agreement<br \/>\n   <\/h2>\n<\/p>\n<p>   The  agreement shall be binding on the taxpayer30 and the commissioner  and31 the tax authorities subordinate to him; however it shall not  remain binding on the parties if there is a change in law or facts of the  agreement.<\/p>\n<h2>5. Termination of  Agreement<br \/>\n   <\/h2>\n<\/p>\n<p>   The  agreement can be declared void <em>ab initio<\/em> if the agreement has been  entered by taxpayer using fraudulent means or by misrepresentation of fact&rsquo;s.32  For termination of such agreement the board may not solely revoke it on its  discretion. The board is required to take permission from the Central  Government in order to revoke the agreement. Once the agreement is terminated  or revoked, the taxpayer will be restored back to such a position as if he had  not entered into any agreement.33<\/p>\n<p>   On the  other hand the rule prescribes that the agreement will not remain binding34  if the parties fail to meet the terms of the agreement35 or if there  is a change in the critical assumptions of an agreement. In such a case the  agreement can either be revised or cancelled after due notice. If the parties  opt for revision of the terms and conditions then the same has to intimate to  the concerned taxing authorities. The process of notice ensures that natural  justice is being done and the parties don&rsquo;t go unheard.<\/p>\n<p>   However  there are chances of litigation if the agreement is rendered void or cancelled  without proper reasoning or by arbitrary use of powers by the board. To support  this view a US case has been critically examined below:<\/p>\n<h2>USA Case Eaton  Corp. vs. Commissioner36<br \/>\n   <\/h2>\n<\/p>\n<p>   Eaton  Corporation and IRS37 entered into two advance pricing agreements,  first in the year 2004 covering tax years 2001-2005 and then second for  renewing the agreement in year 2006.38 <\/p>\n<p>   The IRS  determined that Eaton Corp. did not comply with the terms of the APAs and  summarily cancelled the APAs and asserted that the taxpayer owes taxes on over  USD 360 million in additional income and levied USD 51 million in penaltie&rsquo;s39.  Eaton and the IRS approached the court to determine the legal standards that  will apply if the IRS unilaterally cancels an APA retroactively.<\/p>\n<p>   Eaton  argued that APAs were enforceable contracts, and IRS must show that they are  entitled to revoke the APAs. Eaton argued that they have complied40  with the terms and conditions of the APAs and the IRS had abused its  dis-cretion in cancelling them. The IRS countered that it cancelled the APAs  under revenue procedures and were administrative determinations. The IRS may  revoke an APA due to malfeasance41 or fraud or lack of good faith  with respect to compliance with the APA&rsquo;s terms and conditions.42<\/p>\n<p>   Eaton cites  that APA is a &ldquo;binding agreement&rdquo;43  and has all of the elements of a binding contract44 breach of APA must be analysed using contract  principles. The APA is signed by both the IRS and tax-payer&rsquo;s &ldquo;authorised  representative&rdquo;.45 In APA  general contract principles apply to its interpretation.46 Eaton has not disputed the power of IRS to  cancel the APA but argues that the right to cancel the APA is a &ldquo;condition  subsequent&rdquo; to contract.47 Accordingly, the IRS could cancel the APA  only under the specific stated reasons as set forth in the terms of the APA.  This is the critical point because if the ability to cancel the contract is a  condition subsequent, then the party seeking to cancel the contract, the IRS in  Eaton, bears the burden of proving non-compliance.48 This would  alter the Tax Court&rsquo;s typical standard of proof, which generally puts burden of  proof on taxpayer to prove that tax deficiency shown by IRS is incorrect.49  The IRS argued that the court cannot &ldquo;look behind&rdquo; the notice of deficiency.50  IRS decided to cancel Eaton&rsquo;s APA occurred before they IRS issued the notice of  deficiency.<\/p>\n<p>   IRS&rsquo;s argument  is that an APA is a type of administrative determination issued pursuant to  section 7805 of the IRC subjected to IRS&rsquo;s discretion.51 The IRS  takes this position because an APA is merely an administrative approach; its  decision to cancel the APAs can be overturned only if the IRS abused its  discretion in cancelling them.52<\/p>\n<p>   Eaton  explains that IRS does not have discretion over whether the APAs will, in fact,  be cancelled.53 When IRS and  Eaton executed the APA, both parties submitted to the limitations imposed upon  them under APAs and general contract law. Eaton argues that if the IRS &ldquo;had  discretion to unilaterally cancel an APA, the APA itself would be meaningless.54<\/p>\n<p>   The Eaton  case is testing the flaws of the APA programme and the question remains unanswered  that whether IRS will respect an APA or dismiss it at will. Eaton in its  statement has stated that: <\/p>\n<p>   &ldquo;In the  last 20 years of APA programme the IRS in no time has publicly asserted that  APAs are not binding. Rather IRS consistently asserted that APAs are binding.  Had [the IRS] advertised that APAs, contrary to fundamental principles, could  be cancelled in [the IRS&rsquo;s] discretion, subject only to a challenge based on  the arbitrary and capricious standard, no taxpayer would have entered into  them.&rdquo;55<\/p>\n<p>   The Indian  tax authorities should be ready for any such dispute in future and should  refrain from taking arbitrary decisions of cancelling APAs.<\/p>\n<h2>6. Eligibility  Criteria<br \/>\n   <\/h2>\n<\/p>\n<p>   The CBDT  has sufficient powers to cancel\/revoke an APA &ndash; however, a taxpayer can only  seek for a revision56 to the terms of the APA and seek for a  termination.57 Once an APA has been signed, it appears that the  taxpayer is bound to follow the terms and conditions of the agreement.<\/p>\n<h2>7. Withdrawal from  the APA process<br \/>\n   <\/h2>\n<\/p>\n<p>   Rule 10J  prescribes the process of withdrawal from the APA process. APA regimes in other  countries generally allow taxpayers a flexibility to withdraw an APA  application at any stage of the process. Such regimes typically enable the  taxpayers to withdraw from an APA application if the negotiated position is not  acceptable or the taxpayer does not see a point in agreeing to an APA because  of a change in business circumstances. In case the taxpayer withdraws from an  APA process, it should seek an assurance from the APA authorities that  disclosures made during APA discussions should not be shared to regular revenue  authorities responsible for transfer pricing audits and tax audits. In India  the APA progamme lacks such confidentiality clause for the taxpayer. Also in  case of withdrawl from the procedure the taxpayer will not be entitled for  refund of fees.58 <\/p>\n<h2>8. Critical  Assumptions<br \/>\n   <\/h2>\n<\/p>\n<p>   One of the  most important elements of the APA is critical assumptions. Any change or deviation from the critical assumptions  can result in an amendment\/revision or cancellation of the APA. An important  aspect of the APA process would be for taxpayers to draw up critical  assumptions that are broad enough that do not require renegotiation,  especially, if a BAPA or MAPA has been executed. APAs consist of critical  assumptions which depend on the TPMs. They are the objective economic and  business criteria that form the basis of a taxpayer&rsquo;s proposed TPM. Critical  assumption is related to the assessee, an industry, a third party, or business  and economic conditions and the continued existence of which is material to the  taxpayer&rsquo;s proposed TPM. Critical assumptions might include a particular mode  of conducting a particular corporate or business structure, business  operations, or many types of expected business volume. Failure to comply with  the critical assumption may cause an APA to be inappropriate or unworkable. The  legal effect of failure to meet a critical assumption is that the APA must be  renegotiated or, failing that, cancelled. A critical assumption may not be  achieved due to uncontrollable changes in economic circumstances, due to  fundamental and dramatic change in the economic conditions of a specific  industry. In addition, a critical assumption may become unmet due to a  taxpayer&rsquo;s act initiated for <em>bona fide<\/em> business reasons, like the  bifurcation or transfer of a business entity or entity covered by the APA, mode  of conducting operations, or a change in business strategy. Indian laws does  not provide any specific list of critical assumptions which are to be included  in the agreement and has been left wide open for the taxpayer and CA to decide  upon it.<\/p>\n<h2>9. Choosing  appropriate APA programme<br \/>\n   <\/h2>\n<\/p>\n<p>   A taxpayer  should smartly choose his APA programme depending on the structure of his  business and countries involved in the transaction. Choice of APA&rsquo;s is  significant wherein critical and complex transactions are involved.<\/p>\n<p>   <strong>Unilateral  APA <\/strong>&ndash; Where there is no treaty, where a large number of countries are  involved, thus making a MAPA impractical, or where small businesses are  involved.<\/p>\n<p>  <strong> BAPA  &amp; MAPA <\/strong>&ndash; In an attempt to procure &lsquo;sound tax administration&rsquo; and to  eliminate any double taxation potential, taxpayers as well as the tax  administrations prefer bilateral\/multilateral APAs over unilateral APAs. BAPA  &amp; MAPA usually takes a longer time to conclude as more than one tax  administration is involved in the process. If the taxpayer is not ready to  engage into such long duration then the tax administrations may choose to  provide a unilateral APA to the taxpayer. In cases where global trading is  conducted on a fully integrated basis (i.e. the trading and risk management of  a book of financial products takes place in a number of different locations,  usually at least three), a multilateral, and not a bilateral, APA becomes  necessary. <\/p>\n<h2>10. Annual Compliance  Report<br \/>\n  <\/h2>\n<\/p>\n<p>   The  taxpayer is required to furnish the annual compliance59 report to  DGIT, for each year covered in the agreement within 30 days of due date of  filing return or within 90 days of entering agreement, whichever is earlier.<\/p>\n<p>   <strong>2. Comparison with other countries<\/strong><\/p>\n<p>   Various  jurisdictions follow different practices for filing, processing and admission  of an APA request. Some adopt a monetary threshold for accepting an APA while  some focus on the degree of complexity involved in the transfer pricing issues  proposed to be covered through APAs. For example, China requires that the  transaction amount under the APA should be over 40 million RMB. UK on the other  hand focuses on the degree of complexity involved in the transfer pricing issues  proposed to be covered.<\/p>\n<p>   Few  countries like Israel60, Italy61 and Lithuania62  the Tax authorities of these countries are given a time period to provide  taxpayers with an adequate response within 120-180 days, 180 days and 60-120  days respectively. Otherwise the APA is deemed to be approved. Generally no  specific time period is provided in other countries.<\/p>\n<p>   In  countries like Australia, Canada, China, Malaysia, Netherlands, Russia,  Singapore &amp; U.S.A. have mandatory pre-filing provisions whereas France,  Germany, Israel, Italy, Japan, Korea, Lithuania, Mexico &amp; U.K. have  optional pre-filing condition.<\/p>\n<p>   Almost all  countries have a time frame of 3-5 years for an APA to conclude but there are  exceptions in cases of countries such as Korea where the taxpayer can decide  the number of years and in U.K. where no fee is prescribed from 18 to 21 months  from date of formal submission.<\/p>\n<h2>JAPAN<br \/>\n   <\/h2>\n<\/p>\n<p>   Japan was  the first country to introduce APA in 1987. Japan has a formal APA program  accessible to all the taxpayers without any precondition. Japanese&rsquo;s tax  authorities reserve the right to reject APA applications in certain cases or if  the application is deemed to be part of a tax avoidance scheme. <\/p>\n<p>   An APA is  made in such a way that it suits the method of calculating the ALP and of the  profitability for future transactions based on the financial data, whereas a TP  examination in Japan deals with transactions over the past years.<\/p>\n<p>   In transfer  pricing examinations, the calculation of an Arm&rsquo;s Length Price is taken at a  particular point. APA often sets a range which satisfies the arm&rsquo;s length  principle that does not bring about any income shifting. It should be seen that  examinations63 does not get disturbed as a result of an APA request.  To have confidence in the APA system, the documents received from a MNC for an  APA review may not be used for the examination. This feature ensures  confidentiality to the taxpayer and can be very well implemented in India.<\/p>\n<p>   Another  important feature of the Japanese APA model is the concept of Rollback.64  When a taxpayer requests &ldquo;rollback&rdquo; treatment of the TPM to the years prior to  the APA period, a rollback may be permitted to the TPM confirmed in the BAPA  and is regarded as the most appropriate TPM for the years prior to the APA  period. Both unilateral and bilateral APAs are accepted, but the National Tax  Agency (NTA) prefers bilateral agreements.<\/p>\n<p>   The APA  team received 149 APA requests till June 2010 and approximately 300  applications were in progress till June 2010. The average duration for  concluding unilateral APAs is 1 year and 2 years in case of BAPA. Additionally,  154 cases of double taxation were resolved during the year under the competent  authority procedure. The average duration to complete APA procedure was around  24.7 months.<\/p>\n<p>   The role of  profit-based TPM methods such as TNMM in Japanese APAs has appeared in over 80%  of the cases resolved in the year ended June 2010. <\/p>\n<h2>USA<br \/>\n   <\/h2>\n<\/p>\n<p>   United  States created the APA to alleviate the cost uncertainty and time spent  resolving TP disputes.65 The premise underlying the APA is that U.S.  and foreign jurisdictions co-operate to tax the company&rsquo;s international affairs  as one global business.66<\/p>\n<p>   Sec. 4 of  the IRS deals with the user fees which is required for each APA request. A  reduced user fee will apply to additional APA requests. The maximum user fee  for any filing involving more than one APA request is $50,000.<\/p>\n<p>   In US small  business transactions are dealt separately. Section 8 of the IRS deals with  special provisions Small Business Taxpayer (SBT) APAs. A SBT is any U.S.  taxpayer with total gross income of $200 million or less.<\/p>\n<p>   Section 7  of the IRS deals with the concept of Rollback which uses regular procedures for  resolving tax issues. Application of the TPM to tax years prior to those  covered by the APA is an efficient measure for increasing voluntary compliance  and of using available resources to address unresolved transfer pricing issues.  The taxpayer may request to consider a rollback in connection with a particular  APA request. <\/p>\n<p>   One of the  important benefits of the USA APA model is its provisions regarding  confidentiality. Section 12 deals with Disclosure. Any information related to  the APA, and the taxpayer&rsquo;s APA request for that APA, are return information  and are confidential. See. 6103, 6105, 894, and 7852(d) and are not &ldquo;written  determinations,&rdquo; and they are not open to public inspection. See 6110.<\/p>\n<p>   Any annual  report or factual information in the background files is under exchange of  information of income tax treaties or tax information exchange agreements. In  cases where the exchange of information is discretionary, information may be  exchanged to the extent consistent with efficient tax administration purpose  and for the practices of the relevant foreign CA.<\/p>\n<p>   Section 15  deals with the application of Paper Reduction Act to the process of APA. The  collection of information is a very tedious process which requires maintenance  of records67. This information collection process includes  compliances given under sections. The estimated duration of record keeping and  filing is 8,200 hours. Books or records should be preserved as long they are  beneficial to the internal revenue services. In normal practice the tax returns  and the information related to it is considered as confidential.68<\/p>\n<p>   <strong>Few  highlights regarding the USA APA model in the year are as follows:<\/strong>\n   <\/p>\n<p>   In 2012  U.S. distributors and U.S. service providers, each represents approximately 30  per cent of the total. 40 per cent of transactions are involved in transfers of  tangible goods and 40 per cent are involved in the provision of services. The  rest of the transactions involved the use of intangible property.<\/p>\n<p>   In 2012  there were 126 APA applications and 140 APAs were completed. <\/p>\n<p>   IRS  recommends companies to utilise their transfer pricing arrangements to manage  the taxation of their cross-border transactions and operations more  efficiently.<\/p>\n<p>   All the  APAs have used standard critical assumptions including few critical assumptions  tied to either the taxpayer&rsquo;s profitability in a certain year or over the term  of the APA, or to the amount of non-covered transactions as a percentage of the  taxpayer&rsquo;s revenue. In 2012 there were no cancellations and IRS did not cancel  any APAs due to the failure of a critical assumption.<\/p>\n<h2>China<br \/>\n   <\/h2>\n<\/p>\n<p>   China has  signed 53 unilateral APAs and 20 bilateral APAs during this 7 year period,  accounting for 72% and 28% of the total number of APAs in China respectively.69<\/p>\n<p>   53% of  China&rsquo;s unilateral APAs were completed within one year, 45% were completed  within one to two years while 2% took two to three years. While Bilateral APAs  generally take more time, 55% were completed within one year, 20% took one to  two years, 20% took two to three years, and the remaining 5% were completed in  more than three years.70<\/p>\n<p>   88% of the  APAs signed 2005 to 2011 still involve the manufacturing industry while only  12% relate to other industries71<\/p>\n<p>   The Chinese  APA Programme offers a rollback options to the taxpayers and claims that the  rollback stipulation has the advantage of resolving many years of potential  transfer pricing issues through the APA application process. The relevant  regulations for transfer pricing investigations are applicable to the rollback  period, as far back as 10 years.72<\/p>\n<p>   The time  required to complete the entire APA process depends on many factors including  the type of APA (i.e. unilateral, bilateral, or multilateral), the complexity  of issues involved.<\/p>\n<p>   The Chinese  tax authorities generally aim to complete the review and negotiation process  within 12 months for unilateral APAs and within 24 months for bilateral APAs.  BAPA require more time to reach a consensus than unilateral APAs do.73<\/p>\n<p>   China  considers that both tax authorities and the enterprise have the duty to keep  confidential all information obtained during the whole process of the APA  including pre-filing meeting, formal negotiation, examination and analysis,  among others. In case of non consensus to reach agreement, the Chinese  authorities are refrained from using the information against the taxpayer.<\/p>\n<h2>Germany<br \/>\n   <\/h2>\n<\/p>\n<p>   There is no  specific legal basis for APA in Germany. Appropriate TP method is the basis of  APA and not the desired tax result. To generate and execute APAs in Germany,  the authority must resort to the Article 2574 of the OECD Model Tax  Convention, which deals with mutual agreement article of the double taxation  treaties, and OECD TP Guidelines, especially its annex &lsquo;&lsquo;Guidelines for  Conducting Advance Pricing Arrangements under the MAP.&rdquo; It is legally binding  and is completed by a &lsquo;&lsquo;binding advance ruling&rsquo;&rsquo; to the taxpayer.75  In Germany, APAs are offered in the form of a binding ruling according to  Section 204 of the Tax Procedure Act (&lsquo;&lsquo;AO&rsquo;&rsquo;)76 or information  provisions in accordance with Section 89 Para. 2 of the AO. A rejection of such  an application often leads to the taxpayer being subjected to even more intense  audit scrutiny in Germany.77<\/p>\n<p>   The main  authority will reject any APA if the tax authorities of the local tax office  oppose the agreement.<\/p>\n<p>   The average  duration of the APA process can extend from one to three years. Pre-filing  meeting may be requested (anonymous or named basis) before applying formally  for an APA.78<\/p>\n<p>   <strong>Information required for APA  applications<\/strong>\n   <\/p>\n<p>   The German  APA Circular is based upon OECD standards. <\/p>\n<p>   <strong>Critical assumption<\/strong>\n   <\/p>\n<p>   Unlike  India Germany provides a particular list of prescribed documents related to the  critical assumptions79 like corporate shareholding structure,  constant conditions regarding regulatory law, customs, import and export  restrictions, constant conditions regarding market conditions, international  payment transactions, market shares, sales prices, import and export  restrictions, revenue volumes, constant conditions regarding regulatory law,  customs, and international payment transactions etc.<\/p>\n<h2>APA documentation<br \/>\n   <\/h2>\n<\/p>\n<p>   The  taxpayer must document and confirm that the conditions80 agreed to  under the APA have been met and that there is no change of the critical  assumptions81. Tax audit will be conducted within the framework  after the compliance of an independent audit.<\/p>\n<h2>Terms of an APA and availability of  rollback<br \/>\n   <\/h2>\n<\/p>\n<p>   An APA may  range between three and five years. A rollback to past periods is allowed if  the factual circumstance of the previous year corresponds with the APA period82  and is handled through the same administrative and negotiation process.  Circular still provides some simplifications with respect to small and  mid-sized enterprises.83 User fees for APAs was introduced in 2007.  According to Article 178a Para 2 of the AO, 20,000 &euro; is charged for every agreement,  &euro;  15,000 for renewal and &euro;10,000 for modification of APA. These fees may be reduced for  taxpayers with minor transactions to foreign affiliated companies.84<\/p>\n<h2>Economic downturn<br \/>\n   <\/h2>\n<\/p>\n<p>   Usually an  economic downturn is not considered as violation of a critical assumption. APAs  can be useful in an economic downturn as the future possibilities of recession  on transfer pricing as well as the critical assumptions can be discussed  earlier during the pre-filling with the CA.<\/p>\n<p>   By 2008, Germany had total of nine APAs in force,  and five of which were with EU Member States.85 Four APAs were  granted in 2008. Moreover, the CA received 20 to 25 APA requests in 2009. More  than 100 requests are in various stages of the process.<\/p>\n<h2>Canada<br \/>\n   <\/h2>\n<\/p>\n<p>   The Canada  Revenue Agency (CRA) introduced its APA programme in July 1993; taxpayers have  an opportunity86 to pursue unilateral, BAPA or MAPA. The CRA has  made a small business APA programme available to Canadian taxpayers under  certain conditions. CRA charges taxpayers only travel costs it incurs in the  completion of an APA. As of 31 March, 2010, the CRA APA programme had completed  142 APAs since inception and had 95 pending.87<\/p>\n<p>   Some  important findings of the fiscal year 2011-12 are given below88:<\/p>\n<p>  &bull; Currently  over 90% APAs in process are BAPA or MAPA and less than 10% are seeking  unilateral basis.<\/p>\n<p>  &bull; The average  time to conclude a bilateral APA was 44 months including 22 months for the CRA  to undertake due diligence, TP analysis, and preparing position paper. Six  months needed to negotiate BAPAs with foreign tax administrations. 12 months  were needed to draft and sign the corresponding APA agreements.<\/p>\n<p>  &bull; Cases involving transfers of tangible property  constituted roughly 50% and intangible property and intra-group services  represented 31% and 22% of cases, respectively.<\/p>\n<p>  &bull; In 51% of  cases transactional net margin method (TNMM) was proposed. The cost plus,  profit split, comparable uncontrolled price (CUP), and resale price  methodologies were proposed in 16%, 15%, 12%, and 7% of cases, respectively.<\/p>\n<p>  &bull; APAs  involving operations in automobile sector represents 21% of in-process APA.  Computers and electronics sector represents 15% of APA cases.<\/p>\n<p>   The APA  programme fosters a collaborative and co-operative relationship between  tax-payers and other tax administrations. Not only does the programme provide  an opportunity for taxpayers to openly discuss the challenges they face in  attempting to comply with the tax laws of multiple jurisdictions, the  prospective tax certainty provided through the programme helps to reduce  barriers to trade and contributes to the free flow of capital.89<\/p>\n<p>   To overcome  the challenges in APA, applicants are required to provide to the CRA, on good  faith more detailed information pertaining to their financial statements,  business operations, and industry, during the application phase of the APA  process. Since it&rsquo;s a time consuming process90 CRA is trying to set  targets and timelines with foreign tax administrative counterparts and the  identification of priority cases. <\/p>\n<p>  <strong>3. Merits  and Demerits<\/strong><\/p>\n<p>   <strong>Merits<\/strong>\n   <\/p>\n<p>   <strong>Discussion in non adversarial spirit <\/strong>\n   <\/p>\n<p>   Taxpayer  and tax authorities can discuss the transfer pricing issues in a non  adversarial spirit and environment. APA can facilitate free flow of  information, in a less confrontational atmosphere, between the taxpayer and tax  authority for the purpose of agreeing on a methodology which is legally correct  and practically workable. Thus, the interaction between the taxpayer and tax  authorities during the APA negotiation helps in a more objective review of the  issues involved. Also APA has concluded subsequent examination of the  taxpayer&rsquo;s return as it will require less resources and time, because most of  the relevant information about the taxpayer is already known.<\/p>\n<p>   <strong>Certainty<\/strong>\n   <\/p>\n<p>   Once both  the parties have consented to the TPM for duration like 5 years will avoid the  &ldquo;aggressive&rdquo; auditor syndrome and will reduce penalty risks. It avoids  potential assessments and related cash outlays. On the other hand Entry into  APA process reduces involvement of a local tax authority office and forces it  to accept the APA methodology. It will greatly reduce TP compliance and audit  defence costs. As per the Indian APA Rules, the regular audit of the covered  transactions under the APA shall not be undertaken by the TPO once an APA is  concluded. It subsequently simplifies the financial reporting process.<\/p>\n<p>   <strong>Renewal process, reduced cost<\/strong>\n   <\/p>\n<p>   For  renewing the APA the taxpayer need to follow the same formalities and procedure  except pre filing consultation which would reduce the cost up to same extent.<\/p>\n<p>   <strong>No limiting criteria for applicants <\/strong>\n   <\/p>\n<p>   The law  does not prescribe any monetary limit for entering into an APA which opens the  APA option for small corporations.<\/p>\n<p>   <strong>Approval of Central Government<\/strong>\n   <\/p>\n<p>   The  procedure of taking approval from Central Government eliminates the arbitrary  power of the CA.<\/p>\n<p>   <strong>Flexibility in determining ALP <\/strong>\n   <\/p>\n<p>   The  flexibility provided in the Act to choose a desired method of ALP is a boon for  MNCs. This method will aid them to carry on their traditional methods with the  approval of CA.<\/p>\n<p>   In the last  six audits TP in India has emerged as heavily litigated and serious flaws have  came out regarding the certainty of ALP. Once APA is executed, it takes away  the right to make any change to agreed TP  method. Any change in the TP method would subsequently go against the  critical assumption and render APA cancelled.<\/p>\n<p>   <strong>Risk of Double Taxation is eliminated<\/strong>\n   <\/p>\n<p>   APA results  in win-win situation for both the parties involved i.e. taxpayer and tax  administrator.<\/p>\n<p>   BAPA &amp;  MAPA, can be an effective tool in potentially eliminating double taxation. A  pre-mediated and pre-determined TP method which is acceptable to all the tax  jurisdictions will result into optimal allocation of income among the  jurisdictions involved without the risk on an income being double taxed.<\/p>\n<p>   These APAs  ensure that the arrangements will reduce the risk of double taxation, will be  equitable to all tax administrations and taxpayers involved, and will provide  greater certainty to the taxpayers concerned. These APAs offer greater tax  certainty and address the full scope of a transaction and are therefore are  favoured over unilateral APAs. When such agreements are possible, revenue  authorities generally avoid entering into multiple unilateral agreements.  However, the only downside of these APAs is that, there is high time-cost  involved in concluding such type of APAs. This needs to be weighed against the  benefits a taxpayer may achieve in his case. The taxpayers can also enter into  a Synthetic Bilateral APAs means one in India and other outside India<\/p>\n<p>   <strong>FDI<\/strong>\n   <\/p>\n<p>   The APA  programme will attract foreign direct investment as it will aid in boosting the  confidence of the foreign investors by bringing certainty in the transfer  pricing issues.<\/p>\n<p>   <strong>Demerits<\/strong>\n   <\/p>\n<p>   <strong>No time frame to conclude <\/strong>\n   <\/p>\n<p>   The  pre-filing consultation is one of the major aspects by which the applicant can  gain mutual understanding with the tax authorities (APA Team). In case of BAPAs  &amp; MAPAs it is not in the complete control of the Indian CA &amp; APA team  and hence it takes time to complete the process. A major drawback is the  absence of time limit to conclude an APA process. Although no time lines have  been clearly given in the APA Rules, a time-line should also be proposed  internally for completion of an APA to be effective for the taxpayer. <\/p>\n<p>   <strong>No Confidentiality Clause between  the taxpayer and tax authorities<\/strong>\n   <\/p>\n<p>   While  negotiating an APA, one of the requirements would be to share a lot of  information \/ documentation which could at times be confidential\/trade secret.  This involves not only the past positions of taxpayer, but also future plans  and forecasts. On the other hand, if the taxpayer opts to go with the regular  tax audit cycle, the information requirements are limited to the issues  involved for the year under audit. In an APA situation the taxpayer is in  control of information as compared to in a defence situation where information  is demanded.<\/p>\n<p>   In an APA the taxpayer shares various confidential  information like intellectual property rights, trade secrets, technology,  market strategy, future plans, group policy, pricing policy, future business  predictions, revenue model, etc. These informations are sufficient to determine  the past and future acts of the taxpayer. In case the taxpayer finds it  undesirable to share his information with the tax authorities he can resist the  APA and can go back to the regular tax audit cycle. A taxpayer should smartly  opt for an option of assessment depending on his future prospects and  willingness to reveal information. If an APA is not concluded then whether the  information would be shared with the regular audit team is a concern to be  addressed.<\/p>\n<p>   <strong>Uncertain Pre-Filing Process<\/strong>\n   <\/p>\n<p>   The manner in which anonymous pre-filing consultation  would be carried out is not very clear. The APA scheme does not specifically  articulate this process. The manner of importing pre-filing commitments into  APA is not clear. One of the information requirements that need to be fulfilled  in the form to be filed for applying for an APA is a &lsquo;discussion of unassessed  taxation years (Indian and foreign) and related outstanding tax, legal and  other pertinent issues&rsquo;. It is unclear as to the relevance of this information  and the manner in which this information would be used in case the Applicant  decides to not proceed with the application. <\/p>\n<p>   <strong>Rollback<\/strong>\n   <\/p>\n<p>   The purpose  of an APA is to have future tax certainty91 and the taxpayer may  request so that the APA also covers transactions occurred in non-statute-barred  taxation years i.e., a rollback. The mature jurisdictions around the world92  offer Rollback option to the taxpayers.<\/p>\n<p>   In Canada  the CA usually allows rollback subject to few conditions:<\/p>\n<p>  &bull; Non issuance  contemporaneous documentation when requested for at the Tax Service Office  (TSO);<\/p>\n<p>  &bull; when the  facts and circumstances are similar;<\/p>\n<p>  &bull; when the  foreign tax administration and the relevant TSO have both agreed to accept the  APA rollback request; and<\/p>\n<p>  &bull; Appropriate  waivers given in the form.93<\/p>\n<p>   Transactions  occurring in taxation years covered by the APA should include any rollback  period, and this application will not be subject to a penalty. A request for an  APA rollback can have an impact on double taxation and on transfer pricing  penalties. As a result, special considerations associated with an APA rollback  needs to be developed. In India rollbacks can be introduced in view of  increasing TP litigation. Rollbaks can seriously avoid ligation and can cause  profit to both taxpayer and CA.<\/p>\n<p>   <strong>Revision Procedure<\/strong>\n   <\/p>\n<p>   Very tiring  and everything will start from beginning. No time frame to conclude the  revision procedure.<\/p>\n<p>   <strong>No Consensus<\/strong>\n   <\/p>\n<p>   The time  and cost involved in an APA process is huge. There is always a chance that the  parties may come across a situation where tax authorities and tax-payers don&rsquo;t  reach a unanimous conclusion. This may lead to a waste of resources from both  the ends.<\/p>\n<p>   <strong>Taxpayer not included in internal  discussions<\/strong>\n   <\/p>\n<p>   In case of  a bilateral or multilateral APA, the applicant shall not be entitled to be part  of the discussion between the competent authority of India and the competent  authority of the other country\/ countries. The logic is not explained and the  taxpayer deserves an answer that why he is kept out from the negotiation  process between the tax authorities.<\/p>\n<p>  <strong>4.  Whether  the provisions will achieve the desired objects<\/strong><\/p>\n<p>   In India, to avoid TP dispute, about 146 MNCs have  sought advance ruling under APA.94 The program is designed to  resolve all kinds of TP disputes in a principled, cooperative manner, opposite  to the previous adversarial process. The inherent idea of an APA is to increase  the efficiency of tax administration by encouraging taxpayers to present before  the tax authorities all the facts relevant to a proper transfer pricing  analysis and to work towards a mutual agreement. APA reduces the burden of  compliance by giving taxpayers greater certainty regarding their transfer  pricing methods, promoting their issues and by allowing them for discussion and  resolution in advance before the tax authorities.<\/p>\n<p>   An APA provides the taxpayer with legal certainty  on what transfer pricing method will be accepted by the involved jurisdictions.  However, an APA is not set to determine <em>ex ante <\/em>any level of taxable  profit <em>per se<\/em>. Rather; it is a legally enforceable agreement on transfer  pricing methods and critical assumptions, which normally covers selected  transactions (or business activities) for specified years and affiliates of the  multinational company. From the taxpayer&rsquo;s point of view, an APA is worth  achieving under the following circumstances:<\/p>\n<p>  &bull; Associated enterprises are so densely integrated in the  relevant business in such a way that a prudent businessman cannot assign  functions and risk unambiguously to either entity.<\/p>\n<p>  &bull; The relative  value of intangibles contributes significantly to the business value.<\/p>\n<p>  &bull; Comparables  do not exist for the taxpayer&rsquo;s type of business.<\/p>\n<p>  &bull; The taxpayer  seeks legal certainty for strategic business decisions.<\/p>\n<p>  &bull; An APA should  not disproportionately limit the taxpayer&rsquo;s future flexibility on strategic  business decisions.<\/p>\n<p>   In general,  the taxpayer should consider an APA as a strategic tool to deal with transfer  pricing issues. Whenever there is a business reorganisation and\/or revision of  the multinational&rsquo;s transfer pricing system, APAs for complex issues should be  put on the table. From the tax authority&rsquo;s point of view, the introduction of  an APA programme may reduce legal uncertainty in the field of taxation.  Consequently, it will set incentives for foreign direct investments.95<\/p>\n<p>  <strong>5. Suggestions <\/strong><\/p>\n<p>  <strong> Suggestions  for avoiding problems with critical assumptions<\/strong><\/p>\n<p>  1. <strong>Extreme  outer limits<\/strong>. <\/p>\n<p>   The  critical assumptions should be set at an extreme limits and not on  insignificant limits. So as it is difficult to achieve them and that the  taxpayer will not be able to manipulate the critical assumptions as drafting an  APA is a very tedious process and the taxpayer will again have to go through  the making of APA.<\/p>\n<p>  2. <strong>When  possible, make critical assumptions objective.<\/strong> <\/p>\n<p>   Critical  assumptions can be either subjective conditions (e.g., change of business  styles) or objective (e.g., sales dropping by a certain percentage) but as far  as possible these assumptions should be made objective. Example &ndash; Refer to  sales dropping by a definite percentage which is objective which will avoid  disputes regarding the critical assumptions<\/p>\n<p>  3. <strong>Try to  use TPM provisions rather than critical assumptions.<\/strong><\/p>\n<p>   Instead of  including a critical assumption that certain expenses must be within a definite  level, one could specify that for purposes of computing the taxpayer&rsquo;s gross  profit level during the APA years, advertising expenses above a certain amount  will be subtracted from sales.<\/p>\n<p>  4. <strong>Scope of  APA not to be confused with Critical Assumptions. <\/strong><\/p>\n<p>   APA may  specify a new product type which may not be covered. This provision should be  part of the definition of covered transactions but the APA should not include a  critical assumption that new products not be introduced.<\/p>\n<p>  5. <strong>Distinguish  between critical assumptions and aims of APA.<\/strong> An APA may require a taxpayer  to certain conditions. So if the taxpayer does not do so, he has violated the  agreement and other party has the right to enforce or revoke the contract but  this obligation cannot be termed as a critical assumption.<\/p>\n<p>   <strong>Public reporting<\/strong>\n   <\/p>\n<p>   Many countries96 offering  APA programme prepare and publish the annual reports of their APA scheme which  comprises all the statistics related to it. This report is helpful in analysing  the success rate of the APA scheme as well as act as a guide to new industries  planning to enter in APA. Taxpayers are also required to submit, all reports  demonstrating compliance with the rules of APA on a yearly basis in the form of  APA Annual Report. The APA Annual Report substitutes the former formal transfer  pricing documentation process which the taxpayer is required to comply with  under regular transfer pricing legislation and thereby reduces the taxpayer&rsquo;s  cost and time involved in maintaining the annual mandatory transfer pricing  documentation for the international transactions required under the Indian  transfer pricing legislation. India in the coming years can adopt the same  process and publish its annual report to aid prospective taxpayers interested  in APA programmes.<\/p>\n<p>   <strong>Corruption issues<\/strong>\n   <\/p>\n<p>   APA involves a lot of negotiation  and procedures so care needs to be taken to ensure that APA negotiations are  subject to similar oversight and balances as audits in order to mitigate risks  of corruption.<\/p>\n<p>   <strong>Lack of experience<\/strong>\n   <\/p>\n<p>   Negotiation during an APA process is  an art which needs to be performed in a very skilled manner. The less  experienced tax administrations may lack the knowledge and expertise to  negotiate fair APAs, when indulged with huge multinational enterprises. In BAPA  and MAPA there are chances that the less experienced country may land in  disadvantaged position as compared to experienced countries. The risk can be  mitigated by entering into relatively short duration of time, with an option to  extend the agreement in future. Also the CA is not obliged to enter in APA and  they can withdraw from negotiations if an acceptable is not reached. <\/p>\n<p>   <strong>Confidentiality clause<\/strong>\n   <\/p>\n<p>   In an APA process the taxpayer  shares a lot of confidential information for the purpose of efficient taxation.  The board is committed to not share the information with any other person or  authority. However if the parties refuse to enter into APA after pre-filing  procedure then there are chance where the board may use the same information to  grill the taxpayer. This presumption is not protected by any of the clauses of  IT Act. There is a need to introduce a confidentiality clause which can assure  the taxpayer that the information given by him to the CA should not be  disclosed to any other party or be used against him.<\/p>\n<p>   <strong>Rollback<\/strong>\n   <\/p>\n<p>   India can also introduce rollback in  the coming years. It is discretion of the CA who has the jurisdiction in that  particular year to implement or avoid any roll back requested. Taxpayer may opt  for <em>de facto<\/em> rollback where uncertain TP issues of previous years are  present and which can be implemented before completion of negotiations.  Generally the CA around the world has the discretion to turn down roll back  request for unilateral APAs and in cases where APA request would reduce taxable  income. Rollback ultimately aids the taxpayer by exempting him from traditional  TP methodology.<\/p>\n<p>   <strong>May not be beneficial for small  corporations<\/strong>\n   <\/p>\n<p>   Although there is no monetary limit  defined for the taxpayer to enter into an APA but still small enterprises  should refrain from entering into APA because of its huge time and cost consumption.<\/p>\n<p>   <strong>Conclusion<\/strong>\n   <\/p>\n<p>   For gaining  security and certainty in the business world APAs are becoming a necessity in  complex situations, especially where huge transactions takes place and where functions, risk, and IPRs are  shifted to other countries. APAs have shown great results in countries like  USA, Japan and Canada. APA has helped many countries in reducing TP litigation.  The most important aspect of an APA is the fairness and trusting relationship  which is developed between taxpayers and tax authorities. Since the APA has the  potential to reduce TP litigation and aid international transactions, the  Indian economy is definitely going to get a benefit out of it. The Indian APA  system has been well designed but the test run has not yet taken place. Apart from  few features like confidentiality clause and roll backs the programme tends to  bring positive changes in the Indian trading market.<\/p>\n<p>1 Pamela L. Kayfetz &amp; Leo B. Helzel, <em>Transfer Pricing: Achieving Fair National Taxation of International  Transactions,<\/em> 3 ANN. INTERNATIONAL &amp; COMP. L. 193 (1996).<br \/>\n  2 Model Tax Convention on Income and  Capital, OECD September 1995. The work and development of this have involved a  number of countries, which refer to this model in the settlement of  disagreements. <br \/>\n  3 For a discussion of the current  situation as perceived by large multinational corporations, see Ernst &amp;  Young, Transfer Pricing: Risk Reduction and Advance Pricing Agreements, E &amp;  Y 1995 reprinted in 11 TAX NOTES INT&rsquo;L 293 (1995). <br \/>\n  4 Charles F. Connolly, The New Transfer  Pricing and Penalty Regulations: Increased Compliance, Increased Burdens, and  the Search for a Safe Harbor, 16 U. PA. J. INT&rsquo;L BUS. L. 339, 340 (1995).<br \/>\n  5 E &amp; Y, <em>TP: Risk Reduction and  APA<\/em>, 10 TAX NOTES INT&rsquo;L 299 (1995)<br \/>\n  6 This is especially the case when the  competing jurisdictions do not harmonize their tax rules. Wickham &amp;  Kerester, supra note 5, at 401.<br \/>\n  7 Supra note 1 at 194 (1996).<br \/>\n  8 The provisions of TP were introduced  by substituting sections 92 to 92F for the existing section 92 by Finance Act,  2001, w.e.f. April 2002.<br \/>\n  9 Section 92F(ii) defines ALP as &lsquo;a  price which is applied or proposed to be applied in a transaction between  persons other than associated enterprises, in uncontrolled conditions.<br \/>\n  10 Retrieved from  https:\/\/businesstoday.intoday.in\/story\/new-arrangement-vows-to-reduce-transfer-pricing  disputes\/1\/192684.html, Edition 17-03-2013<br \/>\n  11 The attitude of DRP is pro-revenue hence  it defeated the purpose and thereby failed.<br \/>\n  12 Government proposed to introduce safe  harbors, but these are yet awaited. <br \/>\n  13 Alternate mechanism incorporated into  many tax treaties for resolution of International Tax disputes Long time to  conclude MAPs.<br \/>\n  14 APA was first proposed in the Direct Tax  Code (DTC), 2010 but the implementation of DTC itself failed<br \/>\n  15 <em>Vide<\/em> Notification No. 36\/2012,  dated 30-8-2012.<br \/>\n  16 Rule 10F(a) Income-tax Rules, 1962<br \/>\n  17 Taxpayers Information Series-43, Advance  Pricing Agreement Guidance with FAQ, Income Tax Department India, p 1<br \/>\n  18 The term &ldquo;International transaction&rdquo;  includes transactions between the related parties (called &ldquo;associated  enterprises&rdquo; under the Income-tax Act, 1961).<br \/>\n  19 Rule 10G of Income Tax Rules, 1962  defines the persons who are eligible to enter into an APA.<br \/>\n  20 Central Board of Direct Taxes is the  taxing authority in India.<br \/>\n  21 Rule 10F(k) of Income-tax Rules, 1962.<br \/>\n  22 Rule 10F(c) of Income-tax Rules, 1962.<br \/>\n  23 Application for a pre-filing meeting is  to be submitted in Form No 3CEC to the Director General of Income-tax  (International Taxation).<br \/>\n  24 Rule 10H, Income Tax Rules, 1962 makes  it mandatory for a taxpayer to go for a pre-filing process before entering into  an APA.<br \/>\n  25 Application for APA is to filed in Form  No 3CED.<br \/>\n  26 Transfer Pricing Law &amp; Practice in  India, Deloitte, Woller Kluwer Business, 3rd Ed., 2011<br \/>\n  27 Finance Act 2001 w.e.f. 1-4-2002.<br \/>\n  28 Article 9 of the OECD Model Tax  Convention.<br \/>\n  29 Section 92CC (2) of the Income-tax Act,  1961.<br \/>\n  30 Section 92CC 5(a) of Income-tax Act,  1961.<br \/>\n  31 Section 92CC 5(b) of Income-tax Act,  1961.<br \/>\n  32 Section 92CC 7 of Income-tax Act, 1961<br \/>\n  33 Section 92CC 8(a) of Income-tax Act,  1961<br \/>\n  34 Rule 10M(3) of Income-tax Rules, 1962.  Binding effect will cease only after due notice by the parties<br \/>\n  35 Rule 10M(2) of Income-tax Rules, 1962.<br \/>\n  36 140 T.C. No. 18 (June 26, 2013), the  case is still pending before the U.S. Court<br \/>\n  37 Section 482 of the Internal Revenue Code  (IRC) authorizes the IRS to allocate, distribute and apportion income,  deductions, credits and allowances among members of organizations, trades or  businesses owned or controlled, directly or indirectly, by the same interests  to prevent the evasion of taxes and to accurately reflect income.<br \/>\n  38 Both of the APAs were unilateral  agreements between the IRS and Eaton. The APAs in <em>Eaton<\/em> are governed by  predecessors to Rev. Proc. 2006-9: (1) Rev. Proc. 96-53, 1996-2 C.B. 2, with  respect to the Original APA; and (2) Rev. Proc. 2004-40, 2004-2 C.B. 50, with  respect to the Renewal APA. In all respects relevant to the Eaton case, the  revenue procedures governing the APAs are virtually identical <br \/>\n  39 The penalties are computational  &ldquo;additions to tax&rdquo; per section 6662(h) of the IRC for gross valuation  misstatements of income.<br \/>\n  40 IRS Announcement 2011-22, &ldquo;Announcement  and Report Concerning APA&rdquo;<br \/>\n  41 Defined in [IRC] &sect;7121<br \/>\n  42 Rev. Proc. 2006-9, 2006-1 C.B. 278, as  modified by Rev. Proc. 2008-31, 2008-1 C.B. 1133 at sec. 11.06(1)<br \/>\n  43 IRS Announcement 2011-12<br \/>\n  44 In <em>Anderson v. United States<\/em>, 344  F.3d 1343, 1353 (Fed. Cir. 2003) the court held, &ldquo;to form an agreement binding  upon the government, four basic requirements must be met: (1) mutuality of  intent to contract; (2) lack of ambiguity in offer and acceptance; (3)  consideration; and (4) a government representative having actual authority to  bind the United States in contract&rdquo;. <br \/>\n  45 Rev. Proc. 2004-40, 2004-2 C.B. 50, at  sec. 5.08; Rev. Proc. 96-53, 1996-2 C.B. 375, at sec. 6.05(6); IRS Ch. Couns.  Notice CC-2001-016 (delegating signature authority to the APA Director). <br \/>\n  46 <em>United States v. Winstar Corp.,<\/em> 518 U.S. 839, 895 (1996). &ldquo;When the Government enters a contract with a private  party, &lsquo;its rights and duties therein are governed generally by the law  applicable to contracts between private individuals&rdquo;. Memorandum of Law in  Support of Petitioner&rsquo;s Motion for Partial Summary Judgment, Eaton at 2.<br \/>\n  47 A condition subsequent is &ldquo;an event  which occurs subsequent to a duty of immediate performance of a contract after  it has once accrued or become absolute&rdquo;. Park Props. Assocs. LP v. United  States, 82 Fed. Cl. 162, 169-70 (2008).<br \/>\n  48 <em>Javierre v. Cent. Altagracia,<\/em> 217  U.S. 502, 507 (1910); <em>New Britain Mach. Co. v. Yeo,<\/em> 358 F.2d 397, 406  (6th Cir. 1966). <br \/>\n  49 In the Tax Court, there is a presumption  that the IRS&rsquo;s tax deficiency determinations are correct, and the taxpayer  bears the burden of proving that those determinations are incorrect. See Rule  142(a), Tax Court Rules of Practice &amp; Procedure; see also <em>Welch v.  Helvering,<\/em> 290 U.S. 111 (1933). <br \/>\n  50 Ordinarily, the Tax Court does not have  the power to examine the IRS&rsquo;s activities before it issued the notice of  deficiency. See <em>Greenberg&rsquo; s Express, Inc. v. Commissioner, <\/em>62 T.C. 324,  328 (1974); <em>Suarez v. Commissioner,<\/em> 58 T.C. 792, 813-14 (1972).<br \/>\n  51 The IRS has historically issued numerous  different types of guidance under the auspicious of section 7805(b) of the IRC,  including written determinations such as a &ldquo;private letter ruling&rdquo;. See Rev.  Proc. 2013-1, 2013-1 I.R.B. 1<br \/>\n  52 <em>Dixon v. United States,<\/em> 381 U.S.  68 (1965); <em>Auto Club of Mich. v. Commissioner,<\/em> 353 U.S. 180, 184 (1957); <em>Pac. First Fed. Sav. Bank v. Commissioner,<\/em> 101 T.C. 117, 121 (1993).<br \/>\n  53 Petitioner&rsquo;s Memorandum in Opposition to  Respondent&rsquo;s Cross-Motion for Partial Summary Judgment, Eaton at 5<br \/>\n  54 Sec. 6.08 (&ldquo;Signature on an APA by the  APA Director and the taxpayer will constitute agreement to the APA&rdquo;). <br \/>\n  55 Petitioner&rsquo;s Memorandum in Opposition to  Respondent&rsquo;s Cross-Motion for Partial Summary Judgment, Eaton, at 9.<br \/>\n  56 Rule 10Q Income-tax Rules, 1962.<br \/>\n  57 Rule 10R Income-tax Rules, 1962.<br \/>\n  58 Rule 10J(3) of Income-tax Rules, 1962.<br \/>\n  59 Rule 10O(2) of the Income-tax Rules,  1962 prescribes the Form 3CEF for filing compliance report.<br \/>\n  60 Section 85A(d) of the Israel Tax  Ordinance.<br \/>\n  61 Article 8 of Law Decree No. 269 of  September 30, 2003 &#8211; implemented with the Regulation of the Director of the  Revenue Agency of July 23, 2004 &#8211; introduced the International Ruling  Procedure.<br \/>\n  62 The Head of the State Tax Inspectorate  decree VA-106 of 21 October 2011.<br \/>\n  63 Transfer Pricing Administrative  Guidelines on Consolidated Corporate Groups 2-22.<br \/>\n  64 Transfer Pricing Administrative  Guidelines on Consolidated Corporate Groups 2-23.<br \/>\n  65 Seymour Zwick &amp; Theresa Dilvorth, <em>Alternative  Dispute Resolution or Examination by IRS,<\/em> Transfer Pricing (BNA) at 455  (Dec. 13, 1995).<br \/>\n  66 John Turro, <em>IRS Inks Two Pricing  Agreements in Derivative Products Area<\/em>, 55 TAX NOTES 725 (1992).<br \/>\n  67 Sections  3.06, 4, 7.03, 10.01, 10.02(1), 10.04, 10.05 and 11.01 of the IRS.<br \/>\n  68 Section 6103 of the Internal Revenue  Code.<br \/>\n  69 China Advance Pricing Arrangement Annual  Report 2011, State Administration of Taxation People&rsquo;s Republic of China p.18<br \/>\n  70 Ibid p. 24<br \/>\n  71 Ibid p. 26<br \/>\n  72 Ibid p. 15<br \/>\n  73 Ibid p. 25<br \/>\n  74 Article 25 provides the German competent  authority with the ability to conclude an &lsquo;&lsquo;advance agreement procedure&rsquo;&rsquo; with  the other competent authorities upon the application of the taxpayer.<br \/>\n  75 Engler, G and Elbert, D, Chapter F:  Procedures, in Voegele, A.\/ Borstell, T.\/Engler, G.: <em>Handbuch der  Verrechnungspreise,<\/em> 3rd version, Beck Munich, 2010<br \/>\n  76 Abgabenordnung<br \/>\n  77 Schnorberger, Stephan &lsquo;&lsquo;Germany&rsquo;s New  APA Circular: Practical Guidance, Clarification&rsquo;&rsquo;, <em>BNA Tax Management  Transfer Pricing Report,<\/em> Volume 15 Number 14, November 22, 2006<br \/>\n  78 Para 2.2 of the APA circular<br \/>\n  79 Para 3.7 of the German APA<br \/>\n  80 Verordnung zu Art, Inhalt und Umfang von  Aufzeichnungen im Sinne des &sect; 90 Abs. 3 der Abgabenordnung  (Gewinnabgrenzungsaufzeichnungsverordnung &ndash; GaufzV) of 13 November 2003<br \/>\n  81 Para 6.1 of the APA circular<br \/>\n  82 Para 7.3 of the APA circular<br \/>\n  83 Para 8 of the APA circular<br \/>\n  84 Retrieved from  https:\/\/www.ey.com\/GL\/en\/Services\/Tax\/International-Tax\/Guide-to-advance-pricing  agreements&#8211; APA&#8212;-Germany<br \/>\n  85 EU Joint Transfer Pricing Forum Draft  2009 APA table, (https:\/\/ec.europa.eu\/taxation_customs\/taxation\/company_tax\/transfer_  pricing\/forum\/index_en.htm)<br \/>\n  86 Information Circular 94-4R, Canada  Revenue Agency<br \/>\n  87 https:\/\/www.ey.com\/GL\/en\/Services\/Tax\/International-Tax\/Guide-to-advance-pricing-agreements&#8211;APA&#8212;-Canada,  Retrieved on 16:36, 06\/09\/2013<br \/>\n  88 Advance Pricing Arrangement, Programme  Report, 2011-12, Canada Revenue Agency pp 2,3<br \/>\n  89 Ibid p. 17<br \/>\n  90 Ibid p. 16<br \/>\n  91 IC 94-4, <em>International Transfer  Pricing: Advance Pricing Arrangements,<\/em> See, for comprehensive guidance on  APAs<br \/>\n  92 Germany, US, Japan, China, Canada offers  a option of rollback in their APA programme.<br \/>\n  93 Outlined in sub-paragraph 152(4)(a)(ii)  of the Income-tax Act (Canada)<br \/>\n  94 Retrieved from  https:\/\/articles.economictimes.indiatimes.com\/2013-05-26\/news\/39538214_1_pricing-apa-international-transaction  May 26, 2013<br \/>\n  95 Vo&uml; gele\/Vo&uml; gele: Advance Pricing  Agreements bzw. Verbindliche Ausku&uml; nfte im Rahmen der neuen deutschen  Verwaltungsgrundsa&tilde; tze, NWB Steuer und Studium, 2002<br \/>\n  96 This paper has made references from the  data available in APA Reports published by the various taxing authority around  the world like China, USA, Germany, Canada, etc.<\/p>\n<\/p>\n<div class=\"journal3\">\nAdjudged the &#8220;Best  Research Paper&#8221; of the 9th Nani Palkhivala Research Paper Competition 2013\n<\/div>\n<div class=\"journal3\">\nSee also <a href=\"https:\/\/www.itatonline.org\/info\/index.php\/cbdt-releases-transfer-pricing-advance-pricing-agreement-scheme-apa\/\">\u201cAdvance Pricing Agreement Scheme\u201d as notified vide Notification No. 36 of 2012 dt 30.08.2012<\/a>, <a href=\"https:\/\/www.itatonline.org\/info\/index.php\/cbdts-advance-pricing-agreement-guidance-with-faqs\/\">CBDT&#8217;s Advance Pricing Agreement Guidance With FAQs<\/a> &#038; <a href=\"https:\/\/www.itatonline.org\/info\/index.php\/press-release-explaining-advance-price-agreement-apa-scheme\/\">Press Release Explaining \u201cAdvance Price Agreement (APA) Scheme\u201d<\/a>\n<\/div>\n<\/p>\n<table width=\"100%\" border=\"1\" cellpadding=\"5\" cellspacing=\"0\" bgcolor=\"#FFFFCC\">\n<tr>\n<td><strong>Disclaimer: <\/strong>The  contents of this document are solely for informational purpose. It does not  constitute professional advice or a formal recommendation. While due care has  been taken in preparing this document, the existence of mistakes and omissions  herein is not ruled out. Neither the author nor itatonline.org and its  affiliates accepts any liabilities for any loss or damage of any kind arising  out of any inaccurate or incomplete information in this document nor for any  actions taken in reliance thereon. No part of this document should be  distributed or copied (except for personal, non-commercial use) without  express written permission of itatonline.org<\/td>\n<\/tr>\n<\/table>\n<p><a name=\"link\" id=\"link\"><\/a><\/p>\n<div class=\"journal2\">\n[download id=&#8221;52&#8243;]\n<\/div>\n<div align=\"center\">\n<div class=\"\"><\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>The <a href=\"http:\/\/www.itatonline.org\/info\/index.php\/cbdt-releases-transfer-pricing-advance-pricing-agreement-scheme-apa\/\">Advance Pricing Agreement Scheme<\/a> (APA), which was notified on 30.08.2013, presents a steep learning curve for the taxpayers and the revenue though it has been in operation in other countries for several years. The authors have, after deep study of the Indian law and that prevailing in other Countries, identified all the complexities in the Scheme and suggested measures to resolve them<\/p>\n<div class=\"read-more\"><a href=\"https:\/\/itatonline.org\/articles_new\/transfer-pricing-the-law-and-practice-of-advance-pricing-agreements-apa\/\">Read more &#8250;<\/a><\/div>\n<p><!-- end of .read-more --><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[1],"tags":[],"class_list":["post-1650","post","type-post","status-publish","format-standard","hentry","category-articles"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/posts\/1650","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/comments?post=1650"}],"version-history":[{"count":0,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/posts\/1650\/revisions"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/media?parent=1650"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/categories?post=1650"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/tags?post=1650"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}