cutting through complexity

India's New AdvancePricing Agreement(APA) Program

Presenter

Alpana Saksena

International Tax ConferenceMumbai

Dec 7, 2012

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ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED ORWRITTEN BYKPMG TO BE USED, AND CANNOT BE USED, BY A

CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF(I) A VOIDING PENALTIES THA T MAY BE IMPOSED ON ANY

TAXPAYER OR (II) PROMOTING, MARKETING OR RECOMMENDINGTO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, withoutlimitation, the tax treatment or tax structure, or both, of any transaction described in the associatedmaterials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax

analyses contained in those materials.

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India - Traditional Dispute resolution - An Overview

Level of authority / Court

Transfer Pricing audit 4 years from date of filing returnOften repetitive additions

DRP/1s t Appeal(Commissioner

(Appeals)9 months to 3 years

Final authority onfactual issues

2nd AppealIncome tax Appellate

Tribunal2 - 3 years

Only substantialquestions of law

3rd AppealHigh Court

5 years

Final AppealSupreme Court

Domestic litigation - Total time 15 years +

5 years

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APA Program in India

Legislative Provisionsand Procedure

(Announced in Budgetof March 2012)

APA Program - Basic Legislative Provisions

Sections 92CC to 92CD of Income Tax Act 1961f independent member firms affiliated with KPMG

APA Rules - Operating Guidelines(Announced 30th Aug 2012)

APAs can be unilateral as well as bilateral / multilateral

Transactions to be covered• existing transactions (application to be filed by March 31 for transactions beginning 1s t April)• new international transactions (application can be filed before undertaking transactions)

Pre-filing consultation mandatory - specified format (anonymous option available)

Specified format for APA application - withdrawal / renewal of APA possible

Schedule of APA fees

Particulars

Transaction value up to INR 1 bn (approx USD 20 mn)

Transaction value up to INR 2 bn (approx USD 40 mn);

Transaction value above INR 2 bn (approx USD 40 mn)

Fees

INR 1 million (approx USD 20,000)

INR 1.5 million (approx USD 30,000)

INR 2 million (approx USD 40,000)

APA teams to include panel of specialists such as economists, statisticians, etc

Annual compliance report required , compliance audit would follow.

Rules 10F to 10T of the Income Tax Rules 1962

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APA process

Mandatory Pre-filing Consultation

iUnilateral APA BAPA MAPA

I Application

DGIT Indian CA

Applications checked for deficiencyopportunity to correct available

Other CA

MAP Arrangement

APA Team includingindependent experts

Hearings,info requests,site visits

i

Mutually agreed draftAPA to be prepared

Final APA

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APA Process - A quick overview

Pre-filing Post-prefiling PhaseApplication for pre-filingconsultation

Key milestones

Pre-filing> Consultation

(Form 3CEC)

Key details

Concluding pre-filingconsultation

Formal APA applicationlodged Concluding APA

Pre-filingProcess and

Outcome

The APAApplication(Form 3CED)

Negotiation &Settlement

AnnualCompliance(Form 3CEF)

Prescribed formatrequires details of:

Coveredtransactions,

Functions, assets,risks

Proposedbenchmarkingmethodology, PLI,Comparables

Critical assumptions

Past audit history

APA team holdsconsultations to

Exploresuitability of APA

identify issuesfor detaileddiscussion

Discuss scope ofcoveredtransactions

Are non bindingOutcome will beconveyed inwriting

Detailedapplicationdevelopinginformationprovided at pre-filing stage

Forecastsestimatesrequired

• Submission reviewedby APA Team

Site visits,discussions, jointmeetings to gain abetter understanding

After review, analysis& evaluation stage,positions of the APAteam is discussedand agreed with thetaxpayerAPA signed

Taxpayer to file aYOY compliancereport with todemonstratecompliance withAPA terms

TPO to conductcompliance audit,to verifycompliance withAPA terms

TPO to submitaudit report to DGITwithin 6 months

affiliated with KPMG

Mandatory Prefiling - The gateway to APA

WhyAdvantageous?

Affords an opportunity to test waters, gauge receptivity of revenueIdentify issues that will require specific development

help taxpayer decide whether APA can be achievedfees for prefiling

AnonymousAdvantageous to taxpayers with difficult dispute history

of anonymity could help in frank discussions

Preparationrequired

Requires similar preparation as for TP Audit report

Structured format gives clarity in respect of information required

Advantageous evenif APA not pursued

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Pre-filing could be instructive

Could provide valuable insights into strength and weakness ofAPA proposal and business strategies and models

Assist in being better prepared for TP audit

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Typical Transactions for APAs

India specific transactions suitable for APAs

Software development & ITES services

Management services and royalty pay outs

Contract R&D (Pharma / Software)

Contract manufacturing

Intercompany loans, advances and guarantees

Distributors and marketing intangibles

Start up companies with losses

Any new transactions - no dispute history

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Are you ready for an APA? Options to pursue?

Nature oftransactions

Cost benefitAnalysis versus

outcome

Looking forcertainty ?

When unilateral

Transactions critical to businessIn perpetual dispute and litigationNew transaction - possibility of disputeLosses / contentious audit triggers

ProbablyYes

Time / expense/ resources vs size of transactionsTransactions too small and simple [No disputes with tax authoritiesOutcome of audit vs APA would be similar

Regardless of nature of transactionsTax authorities habitually aggressiveLitigation processes lengthy / outcomes uncertainGoal is to manage potential controversy

When the dispute is primarily in IndiaIf relationships between CAs strainedIf APA program new in country of operation

ProbablyYes

Othercases

Bilateral

When bilateralTransactions are interdependentWhere the anticipated outcome in India may be differentand therefore needs to be agreed upon with overseas CAWhen possibility of economic double taxation exists

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Possible Pros & Cons of an APA

Anonymous pre-filing consultation has specific advantages

APA gives Certainty for 5 years -prospect of renewal for 5 more years

simpler compliances after APA has been entered into

Reduces documentation burden

Time and cost saving

Preferred by tax authorities

Possible persuasive value in litigation and open audit years.

Modest upfront cost

No time limit prescribed under the APA rules

Detailed information required in pre-filing /for APA application

No rollback provisions

Bilateral APAs dependant on relationship with treaty partner

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Indian Revenue- Positive Perspective on APA Program

APA program based on International Best Practices

Revenue APA team has been proactive and positive in its approach

The key perspectives of the APA team are :

• To reduce litigation and provide certainty

• Early filings - could leading to possible first mover advantage/ quick resolution

• Negotiation with open mind in collaborative environment

Adverse audit history - not to impact negotiations

• APA proposal to be looked at from a fresh perspective

• Not bound by past history

• Attempt to reconcile differences /contentious positions

• Open to mutually agreeable solutions

Changed attitude reflected in composition of APA teams, specialists included in teams

"We agree that implementation will be the key and I can assure you that the Indiantax administration is keen to make this APA program a huge success."DGIT, Mrs. Promila Bhardwaj during the first ever webinar initiated by KPMG in September 2012

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APA - Regulatory Set-up in India

Chairman CBDTDr. Poonam Kishore

Saxena

I•

DGITMntlTax)Promila Bhordwoj

Commissioner APAKamlesh Varshney

Competent AuthoritySanjay Kumar Mishra

Mumbai BengaluruM M

Director APABatsala Jha Yadav

Addl. Joint DeputyCommr Commr Commr(APA) (APA) (APA)Manoj Sobhan S.K.Pandey Kar Chatterjee

UNILATERAL

BILA TERAL/ MULTILA TERAL

Asst.Commr(APA)Neha

Chaudhary

Addl.Comm.(APA)

VikramBatra

DeputyCommr(APA)DileepKumar

JointCommr(APA)Satya

SaiRath

DeputyCommr(APA)KiranKatta Under

SecretaryAPA-IAshishHelewal

UnderSecretaryAPA-IIMirnaliniKaurSapra

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Abbreviations

APA - Advance Pricing Agreement

ALP - Arm's Length Price

AEs - Associated Enterprises

Board / CBDT - Central Board of Direct Taxes

BAPA - Bilateral APA

CIT - Commissioner of Income Tax

MAP - Mutual Agreement Procedure

MAPA-Multilateral APA

TP - Transfer Pricing

TPO - Transfer Pricing Officer

PLI - Profit Level Indicator

USD - United States Dollar

CT - Covered Transactions

CA - Competent Authority

DGIT- Director General Income-tax (International Tax)

DTAA - Double Taxation Avoidance Agreement

FAR - Functions, Assets and Risks Analysis

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