India Introduces Guidelines For Advance Pricing Arrangement Program

Author:Mr Dale Hill
Profession:Gowling Lafleur Henderson LLP
 
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INTRODUCTION

On August 30, 2012, the Central Board of Direct Taxes ("CBDT") issued guidance on its advance pricing arrangement ("APA") program. This release provides critical guidance to taxpayers and brings in much needed rules to introduce the APA program in India. The introduction of the APA program is designed to give taxpayers greater certainty on international transactions between related parties operating in two or more tax jurisdictions. Much of the guidance discusses provisions that, in name, are similar to those implemented in countries where transfer pricing legislation is more developed, such as Canada. The release of this guidance is welcomed. The news signals that India is serious about providing taxpayers with a clear framework for gaining tax certainty.

The CBDT can expect to face a steep learning curve when developing the APA program, as it relates to how it will provide the benefits that multinationals need and expect. Given I was involved in the Canadian APA program from its early inception and witnessed how it evolved over the years, I will draw on my 17-years of APA experience from both the Government and private sector to illustrate how the APA program in India should evolve and the problems it may face.

Why an APA Program is Important

India has been an economic wonder over the last decade. The country has achieved astonishing economic expansion while simultaneously keeping inflation in check. As the world economy becomes increasingly globalized, countries need to ensure that their international tax laws and practices are seen as transparent. Failure to institute legislation that is deemed transparent by international investors serves to increase uncertainty and helps drive investors away. Generally speaking, tax systems that allow firms to understand what is expected of them, and the consequences associated with not complying with tax laws, serve to improve the economic climate for international investors.

Transfer pricing can serve as a tool used by companies to reasonably assign profits to lower tax jurisdictions by strategically locating functions, assets, and risks. India is viewed by many foreign nationals with suspicion. In relation to the current transfer pricing climate in India, many taxpayers view the Indian tax authorities and the transfer price adjustments they generate as inconsistent, viewing the tax authority with much precaution. Adjustments vary from state to state, and the size and scope of such adjustments do not seem to make economic sense. Consequently, firms should know what to expect and how to gain tax certainty as they relate to transfer pricing.

Given an APA is a formal arrangement between a particular taxing authority and a taxpayer involved in cross-border transactions with a foreign related entity to gain tax certainty on one or more international transactions, gaining some degree of tax certainty for firms operating within India becomes a welcomed feature of the Indian tax code. The recent guidance for the APA program demonstrates that the Indian Governments want to find a way for taxpayers to achieve this certainty, as they relate to international transactions. While this may be deemed as good news by the international community, and may increase foreign direct investment, much time will be needed to ensure that the skill required to generate tax certainty (through...

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