India signs first ever bi-lateral APA with Japanese company
In December, India’s Central Board of Direct Taxes (CBDT) signed the first bi-lateral advance pricing agreement (APA) with a Japanese company.
“The APA scheme has been introduced to bring about certainty and uniformity in transfer pricing matters of multi-national companies and reducing litigation,” said a spokesperson from India’s CBDT.
The agreement has a retroactive clause for four years and will stand for five years on the company’s Indian operations. “For nine years this company will have a certain tax position. Going forward to five years, the company can grow its business without unnecessarily being concerned about their approach,” said SP Singh, senior director at Deloitte India, which advised on the deal.
The deal took 18 months to complete, shorter than the two-to-three-year time frame originally estimated by advisers.
“From a foreign MNC perspective, this is a very good sign that India will take reasonable positions in APAs and not only that, they will do APAs within a reasonable time frame,” said Arindam Mitra, transfer pricing partner at Deloitte Japan.
India’s APA programme has seen high demand. Five unilateral APAs were completed out of 146 applications during the programme’s first year in 2013 and the country surpassed that figure in 2014.
Transfer pricing has become a major area of focus for India’s tax administrators. Partners at EY India estimate that over 10,000 audit cases have been given to transfer pricing officers over the past nine years, leading to thousands of adjustments costing taxpayers more than $17 billion.
“From a business perspective it’s really important for Japanese companies investing in India. And it’s not just Japanese companies. Generally, MNCs have had a very hard time dealing with the India tax authority on transfer pricing matters,” said Mitra.
Japan has a traditionally strong APA programme, and the deal comes at a time of increasing investment between the two countries.
However, India is renowned for its large and frequent adjustments on tax positions. “In the context of growing economic ties between Japan and India... this APA is expected to generate positive sentiments among Japanese investors in India,” said the CBDT in a statement.
“ [Japan’s] confidence that India’s authorities are serious to resolve tax disputes has been established. Now they are looking at the whole system in a more positive way,” said Singh.
The peculiar challenges with APA deals, according to Mitra, are determining which specific cross border transactions will be applicable to the structure since many deals concern more than two jurisdictions.
“Just like in any other company there are certain unique elements to this,” said Mitra. “There are always challenges to cover transactions with other [third party] countries, but the Indian tax authorities are willing to address those issues.”
The media has reported that the company is large a Japanese trading conglomerate, however representatives from the company named were not able to confirm the deal.
Partners at legal and tax accounting firm, Nishith Desai, said Japanese M&A is likely to increase in 2015 given Japan’s stagnant economy.
Though it is only able to enter BAPAs with Japan, India is renegotiating pre-existing double taxation avoidance agreements. The country is hopeful that it can facilitate BAPAs with companies based in trading partners France, Germany, Singapore, and South Korea once the renegotiations are complete.
Tax professionals say the agreement is a huge step for improving investor confidence in India, though Singh says companies have to be willing to compromise to ensure negotiations with tax authorities succeed.
“If you are transparent and you ensure that you give the correct and complete picture to the authorities as well as the taxpayer, you can achieve a solution which will be good for everybody,” said Singh. “I think this will become a very good way of avoiding tax litigation.”
Mitra agreed: “The outlook is good – we have another two [BAPAs] that are in the pipeline that should be finalized, we are hoping, within the next 12 to 18 months.”