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India’s APA programme a possible substitute for a dispute resolution mechanism

After six years of steady progress, India’s advance pricing agreements (APA) may give multinational companies the certainty they crave, while the system still lacks an effective dispute resolution mechanism.

The APA programme has become a crucial means of preventing disputes from starting. Foreign investors have turned to the programme to guarantee that their TP arrangements are secure from the threat of a prolonged struggle in the courts.

Jimmy Spencer, CFO at Chemtex Group of Companies in India, suggested that the programme still has plenty of room for improvement.

“The APA regime in India started out very slowly more than five years back,” Spencer told TP Week. “It was a new concept in India where experienced tax officers were not very familiar with the process and were treading very cautiously during the first two years.”

Lengthy TP disputes are one of the biggest problems facing multinationals operating in India, and the launch of the APA programme was a conscious effort to level the amount of controversy. In the past, adverse orders were used to cover certain business transactions.

This was unsustainable and put the arm’s-length principle (ALP) at risk in some cases. When the Indian government reformed the country’s transfer pricing system, the tax authorities were still grappling with the new rules and took the safe route of forcing TP adjustments on multinationals.

“TP adjustments were made on flimsy grounds to include even income not covered under an associate company transaction,” the CFO said, adding: “This resulted in increasing the complexity of tax disputes in India.”

What followed was a huge pile up of litigation with no corresponding infrastructure to expedite such disputes. This is why more than 1,000 companies have decided to opt for APAs in India. Such companies bet that the risks of a dispute are not worth taking.

As one vice president of finance in the manufacturing sector told TP Week: “If you have tax certainty, you can concentrate on the business and plan your tax liability rather than thinking about litigation all the time.”

Three challenges

There are three key challenges for the APA programme: one is the rigid negotiating process, second is the lack of support and third is the disadvantage of a unilateral model. The programme allows for bilateral APAs, but these agreements are not as common.

“It’s difficult to have a quick turnaround and APA negotiations are often delayed. Furthermore the legislation does not allow ongoing audits to be suspended,” said Vishweshwar Mudigonda, partner at Deloitte India in Bangalore.

“So taxpayers can be expected to take part in audit proceedings, even when they are trying to secure an APA,” he added.

At the same time, the programme is held in high regard by many taxpayers – or at least those who have secured agreements. “Our APA process was concluded in less time than the average,” one head of global tax at a trading company said.

“However, the process seems cumbersome at the commissioner level, where our file was stuck for almost five to six months on [permanent establishment],” the head of tax said. “Taxpayers should feel comfortable at least at the APA commissioner level. The lead time at this level needs to be reduced.”

There is always a certainty for the covered transactions unless the nucleus of the business model changes. The advantage is that the APA guarantees those transactions are secure from a TP angle. So the fact that the process may be cumbersome is unlikely to hold back businesses from taking this course.

It’s still the case that the Indian APA programme has a track record for delivering unilateral and bilateral APAs on a shorter timeline than a lot of other countries. But the median time for getting a unilateral APA stands at 32 months, and 42 months for a bilateral APA.

“I do not think our APA process is cumbersome,” said Akhilesh Ranjan, India’s principal chief commissioner of income tax (international). “In fact, we have concluded some of the fastest APAs during the first couple of years of the programme.”

“There have been instances of delays lately,” the commissioner continued, adding: “but this is more due to shortage of resources and increasing complexity of issues, rather than any systemic problems.”

Many TP directors would still call for the authorities to strengthen the APA infrastructure. This means closing the skills gap and hiring more tax officers with the appropriate skill level. But the real difficulty is reducing the average time for concluding APAs.

The problem with the latter is that TP is very much based on documentation, especially when it comes to dispute prevention. This is why some tax professionals think it’s unlikely that the APA programme will be streamlined.

“Taxpayers have to reveal their assets and what they are doing with their intangibles, for example, and what kind of risks they’ve assumed,” said Sanjay Kumar, partner at Deloitte India in New Delhi.

“These are very important considerations for a business and it’s not possible to meet all the requirements just by skim-reading the details and rushing through the process,” he told TP Week. “It may be cumbersome, but there is very little you can do to alleviate this factor.”

Kumar stressed that the APA programme has to make the country more attractive for investment. This means the commissioners can’t just operate as auditors, it’s about improving the ease of doing business in India.

Driving down risk

Even after six years of APAs the threat of TP disputes is very real. Although the number of cases has fallen, the complexity of disputes has only increased. This highlights the limits of the APA programme and it may suggest the system is lacking in some area.

“One of the reasons that we had such a massive number of APAs in India was that there was no effective dispute mechanism in place for such cases,” Mudigonda said.

“Disputes can go all the way to the Supreme Court and it can take as long as 10 to 15 years to settle on of these cases,” he told TP Week, adding: “Many multinational companies found that the APA process was a better way because it pre-empted and prevented disputes in the first place.”

As in so many countries, the software industry has taken the brunt of TP litigation in India. Tech companies are often an easy target for aggressive tax authorities looking for ways to raise tax revenue. This isn’t to say that all taxpayers have a negative relationship with the Indian tax authority.

“My personal experience of working with the revenue service is quite good and it looks like revenue is quite understanding of the taxpayers’ position, provided a clear and accurate picture is presented,” the vice president at the manufacturing company said.

On the other hand, many taxpayers and TP practitioners still see the need to improve on the existing system. The APA programme may have helped to reduce the number of disputes in India, but it may not be enough to rely on preventative measures.

“One of my favourite ways to resolve cases is to empower the panels already in existence and move them up in the decision-making hierarchy and make them more independent,” Mudigonda said. “That’s one good way to make things better.”

APAs will become more and more important for taxpayers, but unless India introduces a dispute resolution mechanism the threat of litigation will continue to be a headache for multinationals doing business in the country.

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