4. ACHIEVEMENT OF DESIRED OBJECTS OF APA
4.1. The advance pricing arrangement is a procedure that provides legal certainty and stabilises the tax environment of multinational enterprises. Indian and foreign firms that so desire can enter into an agreement with the tax administration on the method to be used for pricing their future intra-group transactions. This procedure avoids the problems encountered by multinational enterprises and also ensures that the method used in compliance with tax laws also complies with the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the OECD in 1995. The bilateral nature of advance pricing arrangements means that they eliminate the risk of double taxation, while at the same time preserving the tax base of the Contracting States.
4.2. The advance pricing arrangement is a procedure that provides legal certainty and stabilises the tax environment of multinational enterprises. French and foreign firms that so desire can enter into an agreement with the tax administration on the method to be used for pricing their future intra-group transactions. This procedure avoids the problems encountered by multinational enterprises and also ensures that the method used in compliance with tax laws also complies with the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the OECD in 1995.
4.3. To avoid any potential disputes, or problems of double taxation caused by transfer pricing re-assessment, the taxpayer may apply for Bilateral APA in order to
- Ensure APA is consistent with the Revenue Code
- Avoid, and eliminate, double taxation according to Double Tax Agreements (DTAs) signed between India and other jurisdictions.
- Prevent tax avoidance and evasion
- Enhance knowledge and understanding between the taxpayer and the tax authority.
- Indicate certain tax liabilities
5. COMPARISON WITH OTHER COUNTRIES
5.1. The frontrunners in the implementation of formal APA schemes, almost two decades ago, included countries such as USA, Canada, Japan and Australia. The OECD introduced guidelines on APAs in 1995. A number of countries started entering into APA schemes throughout the 1990s, and the end of 1990s saw the UK, Belgium and France introduce their APA schemes. This was followed by other European countries such as Netherlands, Germany and Spain, and the spread of APAs to South American and Asian countries such as Mexico, Venezuela, China and Korea in the last decade.[23]
5.2. UNITED STATES OF AMERICA
The APA scheme was initiated in USA in 1991. Since then the governing APA procedures have been updated and modified four times. The APA process is currently governed by Revenue Procedure 2006-09.
Takeaways
Annual Reports on the USA APA scheme churn out certain interesting facts. Among the APA options available, Bilateral APAs account for the lion™s share. The sale of tangible property into
The US has been the most common type of related party transaction subject to an APA. For the methods used, Comparable Profits Method has been dominant.
For 2010, the top three industries covered by APAs were wholesale trade (durable goods), computer and electronic product manufacturing and professional, scientific and technical services.
5.3. CANADA
Canada™s APA scheme formally came into force in July 1993. The CRA™s Information Circular (IC) 94-4R provides comprehensive guidance on APAs, and the procedures and guidelines for obtaining APAs in Canada.
Takeaways
Canada™s APA scheme Reports reveal certain statistics not too different from those in the USA. For all the APAs completed or in progress, the Bilateral APAs account for the majority by a considerable margin. For transactions subject to APAs, transfers of tangible property dominate.
However, APAs involving intangible property and intra-group services have been recording a fair share too. From the industrial sector perspective, APAs are concentrated in the automotive, natural resources and ˜high-tech™ sectors. Further, a substantial percentage of the APAs involve the application of Transactional Net Margin Method (TNMM) and Profit Split Method.
5.4. UNITED KINGDOM
HM Revenue & Customs (HMRC) have operated an APA scheme in the UK since 1999. The APA rules are present in Sections 218 230 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).
Takeaways
The taxpayers™ experiences over the years reveal that HMRC have been cooperative with the taxpayers. HMRC have accepted applications based on the complexity threshold. However, taxpayers have expressed concerns on vagueness of the ˜complexity threshold™ definition.
HMRC seem to regard a transfer pricing issue as ˜complex™ when it is unclear on the arm™s length standard to be applied or where there is absence of reliable market comparables. These are broad indications by any standards.
During the APA process, HMRC are also open to addressing pre-existing issues. Thus a taxpayer might be able to resolve open issues Most APAs in the UK are still bilateral, indicating HMRC™s preference for Bilateral APAs.
In addition to the above, in UK an APA mechanism for thin capitalization agreements is in place aimed to achieve certainty on the level of inter-company debt and the rate of interest paid on inter-company debt.
5.5. JAPAN
Japan was the first country to introduce a formal APA scheme in 1987. Japan has made significant improvements in its APA scheme since, more recent being establishment of two new APA sections within its MAP office and an APA division in the Osaka Regional Taxation Bureau.
Takeaways
Along with the other benefits, the APA scheme in Japan brings certain unique advantages. For example, in a Bilateral APA the taxpayer is more likely to obtain acceptance of certain concepts and pricing methods that are not generally accepted under the domestic transfer pricing rules in Japan, such as the use of multiple-year data and the interquartile range.
Further, Japanese tax authorities may not tend to use secret comparables during the APA process. A study of the APA scheme Reports reveals that the manufacturing industry has accounted for the majority of the APAs.
However, there has been an increase in APAs for ˜wholesale/retail™ industries over years. In terms of transactions, there has been an increase in APAs covering intercompany services transactions and intangible transactions even though inventory transactions continue to make up the majority. As regards the methods used, there has been a surge in the use of TNMM and Profit Split Method, with the APAs using TNMM being remarkably high in later years.
6. MERITS AND DEMERITS OF APAs
6.1. THE BENEFITS [24] of APA hereunder listed are in contradistinction with other dispute resolution mechanisms. The list is inexhaustible.
- An APA, by predetermining the appropriate set of criteria to be applied to certain controlled transactions, ensures certainty of tax. This helps the taxpayer adequately plan its budget. When tax is certain, a company can allocate resources to other aspects of the business.
- APA eliminates the risk of double taxation. In the case of bilateral or multilateral APAs, the acceptance, by the competent authorities, of one Contracting Party, of a Unilateral APA concluded by another Contracting State usually resolves the problem of taxation.
- APA could be a supplement to other dispute resolution mechanisms.
- It also reduces the incidences of disputes which would otherwise have arisen in an audit. Because it is futuristic, potential disputes are quickly identified and promptly resolved during negotiations culminating the APA.
- APA reduces recourse to litigation. A taxpayer avoids all theshortcomings of litigation, to wit, the legal fees, drawn out litigation, and uncertainty of the result of litigation.
- Many jurisdictions do not impose any fee upon application for an APA, therefore, in terms of monetary cost, APAs could be relatively cheaper than other dispute resolution mechanisms.
- Once a request for APA is made and finalized, a tax payer need not comply with oneroud documentation requirements because during the negotiations resulting in APA, certain documentation requirements are met and once an APA is agreed, all the taxpayer needs to do is fill a compliance report, usually in a prescribed form. This satisfies documentation requirements in many jurisdictions.
- At the expiration of an APA, same can be renewed. This ensures cooperation certainty of tax and trust on the part of both taxpayer and competent authority and reduced compliance cost for the taxpayer.
- As a result of the complexity of an APA, experts, to wit, economists, lawyers, auditors are, from the onset, involved in a case. Therefore as soon as a dispute arises such can be nipped in the bud hence providing a more efficient and effective mechanism of dealing with disputes.
- An APA, although generally forward looking can, at times, help toresolve disputes which had previously arisen in an audit.
6.2. DEMERITS [25]
6.2.1.Unilateral vs. Bilateral/Multilateral APAs
Unilateral APAs may present significant problems for tax administrations and taxpayers alike. From the point of view of the associated enterprises involved, one problem is the possible effect on the behaviour of the associated enterprises. Unlike bilateral or multilateral APAs, a unilateral APAs gives only certainty for the taxpayer in one jurisdiction and may not in all casees lead to a reduction in economic or juridical double taxation for the MNE group.
If the taxpayer accepts an arrangement that over-allocates income to the country making the APA in order to avoid lengthy and expensive transfer pricing enquiries or excessive penalties, the administrative burden shifts from the country providing the APA to other tax jurisdictions.
On the other hand, there are cases where unilateral APAs may be helpful or even the only possibility. For example, in countries where only unilateral APAs are available, or in cases where many countries are involved, a unilateral APA may be the only pragmatic solution. The same may be true for SMEs and in cases where only a small amount of tax is at stake or where the tax issue is not difficult and does not require the heavier process of a bilateral or multilateral APA. Care must be taken, however, that unilateral APAs are consistent with the arm’s length principle in the same way as bilateral or multilateral APAs.
6.2.2. Specific disadvantages for tax administrations
An APA may initially place a strain on transfer pricing audit resources, as tax administrations
will generally have to divert resources earmarked for other purposes (e.g. examination, advising, litigation, etc.). Demands may be made on the resources of a tax administration by taxpayers seeking the earliest possible conclusion to an APA request, keeping in mind their business objectives and time scales. These demands may not coincide with the resource planning of the tax administrations, thereby making it difficult to process efficiently both the APAs and other equally important work. Renewing an APA, however, is likely to be less time-consuming than the process of initiating an APA. The renewal process may focus on updating and adjusting facts, business and economic criteria, and computations. In the case of bilateral arrangements, the agreement of the competent authorities of both Contracting States is to be obtained on the renewal of an APA to avoid double taxation (or non-taxation).
Experience in some countries has shown that, most often, taxpayers which would be interested in APAs are very large corporations with a good voluntary compliance history which would be audited on a regular basis, with their pricing methodology then being examined in any event.
There are some indications that taxpayers, having experienced difficulty with tax administrations on transfer pricing issues and not wishing these difficulties to continue, are often interested in applying for an APA. There is then a serious danger of audit resources and expertise being diverted to these taxpayers and away from the investigation of less compliant taxpayers, where these resources could be better deployed in reducing the risk of losing tax revenue. The balance of compliance resources may be particularly difficult to achieve since an APAs tend to require highly experienced and often specialised staff. Requests for APAs may be concentrated in particular areas or sectors, e.g. global trading, and this can overstretch the specialist resources already allocated to those areas by the authorities. Tax administrations require time to train experts in specialist fields in order to meet unforeseeable demands from taxpayers for APAs in those areas.
6.2.3. Specific disadvantages for taxpayers
Some businesses expressed concern that an APA may allow the tax administration to make a closer study of the transactions at issue than would occur in the context of a transfer pricing examination, depending on the facts and circumstances. The taxpayer must provide detailed information relating to its transfer pricing and satisfy any other requirements imposed for the verification of compliance with the terms and conditions of the APA. At the same time, the taxpayer is not sheltered from normal and routine examinations by the tax administration on other issues. An APA also does not shelter a taxpayer from examination of its transfer pricing activities. The taxpayer may still have to establish that it has complied in good faith with the terms and conditions of the APA, that the material representations in the APA remain valid, that the supporting data used in applying the methodology were correct, that the critical assumptions underlying the APA are still valid and are applied consistently, and that the methodology is applied consistently.
APAs cannot be used by all taxpayers because the procedure can be expensive and time consuming and small taxpayers generally may not be able to afford it. This is especially true if independent experts are involved. APAs may therefore only assist in resolving mainly large transfer pricing cases. In addition, the resource implications of an APAs may limit the number of requests a tax administration can entertain. In evaluating APAs, tax administrations can alleviate these potential problems by ensuring that the level of inquiry is adjusted to the size and complexity of the international transactions involved.
