By Suchint Majmudar, Hussain Sunel, & Praneeth Narahari, Deloitte Touche Tohmatsu India LLP
India’s Central Board of Direct Tax (CBDT) on 31 August 2018 released the second annual report (2017-18) of its advance pricing agreement (APA) programme, providing a report card of the performance of the programme along with qualitative and statistical analysis.
The APA programme in India is six years old now and is heralded as a success.
India APA applications, conclusions
Since the programme’s inception in 2012, the Indian government has concluded 219 APAs (199 unilateral and 20 bilateral) covering a wide range of industries, transactions, and jurisdictions, the report reveals. This, to contextualise, is more than the number of APA’s China has concluded in 12 years.
A total of 985 APA applications (821 unilateral and 164 bilateral) have been filed since the program began.
Due to the high number of applications filed, there is a huge backlog of APA cases to be resolved, i.e., around 70% of unilateral cases and 85% of bilateral cases that were filed, are yet to be concluded.
The need for expeditious resolution of the cases is not lost on the government, and it has spelled out its commitment towards augmenting and strengthening the APA programme.
Filed numbers up, concluded numbers down
During the most recent period reported, FY 2017-18, 168 APA applications (115 unilateral, 53 bilateral) filed and 67 APAs (58 unilateral, eight bilateral) were concluded, the report states. The list of APAs concluded in 2017-18 also includes the highly disputed transaction of incurring of advertisement, marketing and promotion (AMP) expenses which was covered in a unilateral APA.
The number of APA applications filed in FY 2017-18 includes renewal applications for the first cycle of APAs expiring in FY 2017-18. This reflects on the largely positive experiences and confidence of MNEs from the APA programme.
Concluded APAs are lower compared to 88 APAs signed in the previous year, the CBDT said, due to the greater complexity of cases handled and shortage of manpower.
Although initially there was an overwhelming preference for unilateral APA applications in the APA programme, more recently, the momentum of filing for bilateral APA has increased.
It is noteworthy that the filing of bilateral APA applications (53 filed in 2017-18) has more than doubled in 2017-18 over the past average of 23.
It is noteworthy that the filing of bilateral APA applications (53 filed in 2017-18) has more than doubled in 2017-18 over the past average of 23.
The primary reasons for more bilateral applications is the result of the US Competent Authority opening up the bilateral APA programme between the two countries from February 2016 and India willingness to accept bilateral APAs with all treaty partners, irrespective of the status of Article 9(2) or its equivalent (correlative adjustment) in a tax treaty.
Given these developments, several companies have converted their initial unilateral APA application into bilateral APA applications.
Timelines for India APAs
India concluded unilateral APAs in 32 months and bilateral APAs in 42 months on average, which is better than the world average. The shortest time taken to conclude an APA has been less than 12 months and the longest time so far has been 49 to 60 months.
Factors such as the complexity of the transaction, the nature of the APA application, the responsiveness of the taxpayer and of the APA Commissioner have a bearing on time taken to conclude an APA.
Sectors, nature of transactions
A substantial number of APAs involved the service sector. This reflects the fact that the service sector is the largest contributor to India’s gross domestic product and is also at the forefront of India’s international trade.
Almost 18 different industries have participated in the Indian APA programme.
The statistics further show that as many as 25 types of international transactions are addressed in APA applications during the FY 2017-18 alone, including provision of services (IT, IT enabled, engineering, marketing support, contract R&D, KPO, agency etc.); intra group services; export and import of goods; financial transactions including loans; and guarantees; and Intangible related transactions including royalty; and incurring of AMP expenses.
Provisions of software development services and IT enabled services continue to feature predominantly in the APAs entered into.
Transfer pricing method adopted
The transactional net margin method is adopted in 70% of the international transactions in unilateral APAs and 95% in bilateral APAs entered into in 2017-18.
However, there have also been applications filed by companies and APA concluded based on other methods including the comparable uncontrolled price method, cost plus method, internal resale price method, profit split method and other method.
Countries
In 2017-18, the 58 unilateral APAs entered into cover transactions with 134 countries where the affiliates of the Indian applicants are located.
Not surprisingly, the US tops the list and finds its name as the counterparty jurisdiction in 40 unilateral APAs, followed by the UK, Singapore, and Germany.
For the bilateral APA programme, the UK and Japan lead the list of the APA applications concluded. However, with the US and India bilateral programme opening up, applications for India-US bilateral APAs have increased, and as of 31 March 2018, 38% of the total bilateral applications filed include the US.
Further, with India opening up its bilateral programme to all its treaty partners, this ratio may also change in the years to come.
Mature and scaled APA program
The Indian APA programme has matured and scaled over the past six years as reflected by the number of signed APAs. Complex transfer pricing issues, which were prone to long drawn litigation, are being increasingly resolved through APAs.
While taxpayers have managed to get certainty over transfer pricing issues for five or nine years as the case may be, depending on opting for or opting out of rollback, the government has also been able to divert resources away from the intensive audit and litigation processes to more productive channels.
It is estimated that the 219 APAs signed till 31 March have resulted in additional income of $ 1540 million translating into $ 462 million of tax payment to the government, thus, making APA a win-win situation for both, taxpayers and the tax administration alike.
–– Suchint Majmudar, Partner, Deloitte Touche Tohmatsu India LLP. He can be reached at [email protected] / +91 98868 51453
— Hussain Sunel, Manager, Deloitte Touche Tohmatsu India LLP. He can be reached at [email protected] / +91 91760 78026
— Praneeth Narahari, Assistant Manager, Deloitte Touche Tohmatsu India LLP. He can be reached at [email protected] / + 91 94919 33365
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