India: the road to APAs
TP Week sponsor KPMG reports exclusively from a meeting with the revenue body and the Big Four. KR Girish and Veena Parrikar write
The Indian government has begun deliberations on introducing the APA mechanism in India. On November 27, 2007, the director general of income tax, international taxation organised a discussion in New Delhi, where representatives from the Big Four public accounting firms in India were invited to share their APA experiences with the Indian tax authorities. The meeting was attended by several top officials and transfer pricing examiners from the Indian Revenue Service and by representatives from KPMG, PricewaterhouseCoopers, Deloitte Haskins and Sells, and Ernst & Young.
The tax authorities had requested feedback from the transfer pricing practitioners on several aspects such as the need for APA mechanism in India; the level of expertise required of tax regulators; database requirements; the feasibility of an APA mechanism under the Indian direct tax regime; APA procedures, team organisation and effectiveness of APA programmes in other countries; and suggestions for an APA mechanism suitable to Indian conditions.
While the government officials were aware of the benefits of and APA to the taxpayer, they enquired about the benefits it would confer on the tax authorities. The consulting firms pointed out that the government would have greater certainty in their tax collections as well as greater administrative efficacy, both of which are important as inter-company transactions and transfer pricing in India become increasingly complex. The Indian tax authorities are also cognisant of the fact that an APA program would serve encourage investment in India by multinationals who view an APA as an important component of their overall tax strategy.
A significant part of the discussions comprised of the practical and procedural considerations related to an APA programme. These included the legal framework required to incorporate the APA mechanism into domestic law, fees, filing process, the conditions under which an APA could be revoked, the possibility of small businesses using the APA mechanism, timeframe required to complete the APA process, and documentation required from the taxpayer. The tax practitioners pointed out that due to the time effort, and cost involved in obtaining an APA, the Indian government should allow APA terms of at least three to five years. The taxpayer must also have assurance that the past closed years will not be reopened for audit based on the transfer pricing agreed in the APA. Further, a commitment to speedy completion of APAs would also be highly desirable trait of an APA programme.
Considerable time was also spent on the resources required from the government in terms of personnel and databases. The consulting firms described the organisation structure and team composition of the APA programme of the Internal Revenue Service in the United States. They also emphasized the need for the government to invest in specialized resources for the APA programme, such as economists, accountants, and industry experts. Another recommendation was that the government should form a dedicated APA team rather than having officers rotate in and out of the APA program. A dedicated APA team that negotiates APAs as well as reviews the APA documentation submitted by the taxpayer will ensure consistency in the interpretation of the critical assumptions of the APA, and thus enhance effectiveness.
The recommendations of the transfer pricing practitioners for an APA mechanism in India included the following:
Clearly defined goals and responsibilities for the APA programme
Dedicated APA team, separate from examiners
Employ the right resources (economists, accountants, legal and experts)
Procedural simplicity – ensure conclusion of APA before proposed APA years come up for audit
Position on rollbacks – protection from reopening of closed years
Allow APAs terms of at least three to five years
An approach based on strong commitment to success and building trust between the tax authorities and taxpayers.
The Indian tax authorities have requested continued involvement from community of tax practitioners in their APA deliberations.
Dr Veena Parrikar, KPMG senior manager from the Silicon Valley practice on secondment to India.