What Indo-U.S. Bilateral APAs Entail For U.S. Investors
India’s decision to negotiate bilateral advance pricing agreements (APAs) with the U.S. is a welcome move. Prospectively, negotiations will increase certainty and uniformity in the application of India’s transfer pricing laws to related-party transactions carried out by U.S. multinational corporations (MNCs). In this article, we discuss some of the important caveats that MNCs must watch out for in complying with India’s nascent APAs.
Introduced in 2012, India’s APA regime provides for a framework to determine, in advance, the arm’s length pricing of an international transaction. If concluded as expected, APAs will bring about a reduced compliance cost to companies due primarily to elimination of transfer pricing selection and audit and a decreased burden of maintaining transfer pricing documentation. Businesses must, however, proceed with the APA application process with due care and diligence, especially on the following three fronts.
Time-frame for Completing Application Process
The Indian APA rules are silent on the deadline for completing the various steps involved in the application process. The APA regulations require a mandatory pre-filing consultation to be conducted, but do not set out any time-frame within which an APA must be concluded. This implies that the process may stretch out for a period of four years. It is recommended that companies agree a strict time-frame for pre-filing consultations with the tax authorities.
Disclosure of Sensitive Information
Rules require companies to disclose sensitive information during the negotiation phase, including prospective new technology, marketing strategies, and future market projections. Companies must be wary of filing confidential information given that such information may be shared with the on-field audit officers or even used against the company in the course of regular audits. The confidentiality provisions of the Income Tax Act also allow dissemination of such information within the income tax department.
Pre-Planned “Critical Assumptions”
Finally, companies must take note of the implication of pre-planned “critical assumptions” on the APA. “Critical assumptions” relate to those factors that are so critical that neither party entering into an agreement will continue to be bound by the agreement if any of those factors are changed. At the time of making APA requests, companies are required to include “critical assumptions” in Form 3CED, which will eventually form part of the APA. The “critical assumptions” must be met diligently by companies, as the APA is liable to be cancelled on account of failure to observe such assumptions.
In the wake of several high-profile transfer pricing disputes, bilateral APAs, if pursued alertly, would greatly benefit U.S. investors who have been hedging their bets for too long against a potentially uncertain transfer pricing regime.
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