Tax administrations across the world see transfer pricing as a means to shift profits across jurisdictions; and consequently, they have increasingly resorted to a thorough scrutiny of the transfer prices of multi-national corporations or MNCs. This has seen MNCs concentrating their efforts, time and monetary resources towards avoiding prolonged transfer pricing disputes.
Resolution of litigation by way of appeals before various appellate authorities is not only cumbersome and time-consuming, but also expensive in terms of the costs. Advance pricing agreements or arrangements (APAs) provide an alternate dispute resolution mechanism to address these disadvantages.
Section 118 of the Direct Taxes Code (DTC) Bill, 2010 proposes APA mechanism in India. However, given the uncertainty in implementation of DTC and considering the magnitude of the transfer-pricing litigation, it would be prudent to introduce the APAs in the Budget.
An APA is a framework for tax administration and taxpayer to agree in advance of the tax outcomes at arm's length, thus eliminating the need to audit the taxpayer's international transaction(s) covered by the APA. One of the most important advantages of an APA is to provide certainty, to both the taxpayer and tax authorities. APAs can be unilateral, bilateral or multilateral in nature.
APAs have been adopted by many countries globally including the US, the UK, Australia, Japan, Canada, Belgium, France, Netherlands, Germany, Spain, Mexico, Venezuela, China and Korea.
India can benefit from the global APA knowledge-bank. Besides, learning from the experiences of other countries, India should provide options to MNC taxpayers to choose between unilateral or bilateral or multi-lateral APAs. Bilateral and multilateral APAs are really effective in resolving potential double taxation disputes.
It might be a challenge to administer the entire APA programme in the initial stage. To mitigate or effectively control this challenge, authorities should put in place a competent and sufficiently large team of professionals who are equipped to work on the APA system and ensure arrangement of specialist APA training for these professionals.
The communication process between the taxpayer and authorities also needs to be encouraged and it would be the responsibility of all parties concerned to induce a collaborative approach for the success of the APA process.
The successful outcome from an APA involves extensive negotiation between the taxpayer and authorities. Therefore the introduction of an APA scheme must be accompanied by the development of an environment conducive to a win-win situation. All stakeholders in the scheme must assume equal responsibility to enable a collaborative environment rather than the "heads I win and tails you lose" approach.
The framework should provide for rolling back APA conclusions to past years, including where litigation is pending.
An effective APA mechanism will go a long way in resolving or avoiding the long-drawn transfer pricing disputes, and provide a positive outlook for MNCs.
(Mudigonda Vishweshwar is senior director, Deloitte Touche Tohmatsu India. The views expressed are personal)