Rollback, in the context of the Advance Pricing Agreement (APA), means the application of a negotiated position on pricing of an international transaction under an executed APA to transactions that precede this, provided the particulars of the transactions and circumstances are similar.
India’s APA programme came about in mid-2012. APAs provide certainty to taxpayers by fixing in advance the arm’s length pricing for cross-border transactions between related parties that may occur in a specified period in the future. The existing Indian APA programme is prospective and is applicable for five-year periods. In order to reduce litigation on transfer-pricing (TP) and provide APA ‘certainty’ to firms’ international transactions from years before their respective APAs were reached, finance minister Arun Jaitley has proposed to introduce the rollback mechanism with effect from October 1, 2014. The rollback provision will enable taxpayers to apply the transfer prices agreed upon in APAs for a period not exceeding four years preceding the first year for which the APA is applicable.
It provides for determining the arm’s length price, or the specification of the manner in which arm’s length price shall be determined, in relation to the international transaction entered into by the taxpayer for four previous years preceding the first year of applicability of an APA. However, this provision will be subject to conditions, procedures and manner that are yet to be prescribed by the Central Board of Direct Taxes (CBDT).
Indian tax authorities have made TP adjustments of close to R2.2 lakh crore, or $37 billion, in the nine years of TP audit cycles completed so far. In fact, in the most recent round of TP audits, concluded on January 31, 2014, Indian authorities have made adjustments to the tune of $10 billion. Also, much of the current TP litigation is resolved at the Income Tax Appellate Tribunal (ITAT) level and statistics reveal that majority of the cases have been in favour of the taxpayer. The introduction of the rollback mechanism in the APA programme may prompt revenue authorities to accept the outcome of APAs as equally applicable for the preceding years which would be outside of the appellate process. There are some key facets that emerge from the current development.
It would be interesting to evaluate the APA programme in light of the proposed rollback provisions;
The sound basis and negotiation-based approach for determination of arm’s length prices of international transactions—based on validation of functional, asset and risk (FAR) analysis—for the preceding years increases the certainty of regime for taxpayers;
The APA process is perceived to be rational, transparent and interactive, vis-à-vis TP audit proceedings;
he APA process could be a quicker dispute resolution mechanism, vis-à-vis the normal dispute resolution process through DRP, ITAT, courts, etc;
Assessment years under litigation, which are outside the purview of the four-year period preceding the first year for which the APA is applicable, would continue to be subject to long-drawn litigation processes. However, executed APAs for similar transactions could influence decision of Tribunals and tax courts;
Signing of APAs is not a time-bound process. So, negotiations and reaching of settlement could take substantial time, exposing taxpayers to dual compliances with APA rollback and field audit proceedings, too.
Against this backdrop, it may be of interest to understand briefly the APA rollback provisions from some other jurisdictions, where such rollback mechanism has existed for a few years.
Canada: Rollback in the APA programme is considered either at the behest of the taxpayer, or if the terms and conditions of the prior years are similar, the tax officer may herself choose to apply the concluded APA to the prior years. Rollback provisions are not available for unilateral APAs.
China: Rollback option is available to taxpayers for a period as far back as 10 years preceding the reaching of the agreement. These provisions will be applicable only in case of specific requests made by the taxpayer and if the same is approved by tax authorities.
Germany: A rollback of APA for past years is allowed if the taxpayer proves that the assumptions stated for the APA are also fulfilled for past years. The rollback years are processed under a separate mutual agreement procedure (MAP) that is conducted together with the APA procedure.
Japan: Rollback applies only if the APA request is accompanied with MAP request and the concluded TP methodology is appropriate for past years.
The UK: Rollback applicable to past years either at the request of taxpayers or on the suggestion of tax authorities, only for bilateral or multilateral cases.
The US: A taxpayer may request a rollback to cover one or more of its pre-APA years. Rollback is not applicable to taxable years when period of limitation for assessment of tax has expired. The draft APA revenue procedure provides additional guidance regarding APA rollbacks. As per the draft procedure, the tax authorities reserve the right to pursue an APA rollback for any or all of the taxpayer’s open pre-APA years and the burden is placed on the taxpayer to explain why a rollback of the APA is not to be considered. If the taxpayer refuses to accept a rollback, tax authorities may decline to initiate the APA process.
Based on the practices in overseas jurisdictions, the applicability of rollback of APA outcomes is mostly extended to bilateral or multilateral cases and where there is an ongoing MAP process relating to past litigation. This enables efficient deployment of resources and removes duplication of efforts on the part of revenue, APA authorities and the taxpayer.
Having understood the salient features of other jurisdictions, there are certain concerns or clarifications that are sought of Indian Revenue:
Whether the APA applications filed prior to October 1, 2014, would be eligible for rollback benefits;
Whether the rollback provisions will be available for unilateral APAs;
Whether the rollback provisions could be availed of by taxpayers in cases pending before appellate authorities;
Whether the penalty levied for any past years would be waived for the years of rollback;
Whether double taxation issues stemming from TP adjustments in the rollback years will be addressed;
Whether the taxpayer will be allowed to choose any of the prior four years for cover under rollback;
Practical implementation issues from the tax officers’ perspective.
The rollback provision is an attractive proposition that ushers in greater certainty for taxpayers and foreign investors and affords the much-needed relief to the international taxpaying community, which is weary of the challenges presented by the aggressive regulatory positions and chronic litigation that marks the Indian tax regime. Extending APA applicability effectively for a period of nine years could be one of the most commendable amendments made in the history of Indian tax dispute resolution. There is no disagreement that rollback provisions would prove to be an effective tool for resolving past issues and achieving certainty for future years in a single process. This could prove to be a game-changer and a win-win possibility for both the taxpayer and the taxman (government).
Source : http://www.financialexpress.com/
India’s APA programme came about in mid-2012. APAs provide certainty to taxpayers by fixing in advance the arm’s length pricing for cross-border transactions between related parties that may occur in a specified period in the future. The existing Indian APA programme is prospective and is applicable for five-year periods. In order to reduce litigation on transfer-pricing (TP) and provide APA ‘certainty’ to firms’ international transactions from years before their respective APAs were reached, finance minister Arun Jaitley has proposed to introduce the rollback mechanism with effect from October 1, 2014. The rollback provision will enable taxpayers to apply the transfer prices agreed upon in APAs for a period not exceeding four years preceding the first year for which the APA is applicable.
It provides for determining the arm’s length price, or the specification of the manner in which arm’s length price shall be determined, in relation to the international transaction entered into by the taxpayer for four previous years preceding the first year of applicability of an APA. However, this provision will be subject to conditions, procedures and manner that are yet to be prescribed by the Central Board of Direct Taxes (CBDT).
Indian tax authorities have made TP adjustments of close to R2.2 lakh crore, or $37 billion, in the nine years of TP audit cycles completed so far. In fact, in the most recent round of TP audits, concluded on January 31, 2014, Indian authorities have made adjustments to the tune of $10 billion. Also, much of the current TP litigation is resolved at the Income Tax Appellate Tribunal (ITAT) level and statistics reveal that majority of the cases have been in favour of the taxpayer. The introduction of the rollback mechanism in the APA programme may prompt revenue authorities to accept the outcome of APAs as equally applicable for the preceding years which would be outside of the appellate process. There are some key facets that emerge from the current development.
It would be interesting to evaluate the APA programme in light of the proposed rollback provisions;
The sound basis and negotiation-based approach for determination of arm’s length prices of international transactions—based on validation of functional, asset and risk (FAR) analysis—for the preceding years increases the certainty of regime for taxpayers;
The APA process is perceived to be rational, transparent and interactive, vis-à-vis TP audit proceedings;
he APA process could be a quicker dispute resolution mechanism, vis-à-vis the normal dispute resolution process through DRP, ITAT, courts, etc;
Assessment years under litigation, which are outside the purview of the four-year period preceding the first year for which the APA is applicable, would continue to be subject to long-drawn litigation processes. However, executed APAs for similar transactions could influence decision of Tribunals and tax courts;
Signing of APAs is not a time-bound process. So, negotiations and reaching of settlement could take substantial time, exposing taxpayers to dual compliances with APA rollback and field audit proceedings, too.
Against this backdrop, it may be of interest to understand briefly the APA rollback provisions from some other jurisdictions, where such rollback mechanism has existed for a few years.
Canada: Rollback in the APA programme is considered either at the behest of the taxpayer, or if the terms and conditions of the prior years are similar, the tax officer may herself choose to apply the concluded APA to the prior years. Rollback provisions are not available for unilateral APAs.
China: Rollback option is available to taxpayers for a period as far back as 10 years preceding the reaching of the agreement. These provisions will be applicable only in case of specific requests made by the taxpayer and if the same is approved by tax authorities.
Germany: A rollback of APA for past years is allowed if the taxpayer proves that the assumptions stated for the APA are also fulfilled for past years. The rollback years are processed under a separate mutual agreement procedure (MAP) that is conducted together with the APA procedure.
Japan: Rollback applies only if the APA request is accompanied with MAP request and the concluded TP methodology is appropriate for past years.
The UK: Rollback applicable to past years either at the request of taxpayers or on the suggestion of tax authorities, only for bilateral or multilateral cases.
The US: A taxpayer may request a rollback to cover one or more of its pre-APA years. Rollback is not applicable to taxable years when period of limitation for assessment of tax has expired. The draft APA revenue procedure provides additional guidance regarding APA rollbacks. As per the draft procedure, the tax authorities reserve the right to pursue an APA rollback for any or all of the taxpayer’s open pre-APA years and the burden is placed on the taxpayer to explain why a rollback of the APA is not to be considered. If the taxpayer refuses to accept a rollback, tax authorities may decline to initiate the APA process.
Based on the practices in overseas jurisdictions, the applicability of rollback of APA outcomes is mostly extended to bilateral or multilateral cases and where there is an ongoing MAP process relating to past litigation. This enables efficient deployment of resources and removes duplication of efforts on the part of revenue, APA authorities and the taxpayer.
Having understood the salient features of other jurisdictions, there are certain concerns or clarifications that are sought of Indian Revenue:
Whether the APA applications filed prior to October 1, 2014, would be eligible for rollback benefits;
Whether the rollback provisions will be available for unilateral APAs;
Whether the rollback provisions could be availed of by taxpayers in cases pending before appellate authorities;
Whether the penalty levied for any past years would be waived for the years of rollback;
Whether double taxation issues stemming from TP adjustments in the rollback years will be addressed;
Whether the taxpayer will be allowed to choose any of the prior four years for cover under rollback;
Practical implementation issues from the tax officers’ perspective.
The rollback provision is an attractive proposition that ushers in greater certainty for taxpayers and foreign investors and affords the much-needed relief to the international taxpaying community, which is weary of the challenges presented by the aggressive regulatory positions and chronic litigation that marks the Indian tax regime. Extending APA applicability effectively for a period of nine years could be one of the most commendable amendments made in the history of Indian tax dispute resolution. There is no disagreement that rollback provisions would prove to be an effective tool for resolving past issues and achieving certainty for future years in a single process. This could prove to be a game-changer and a win-win possibility for both the taxpayer and the taxman (government).
Source : http://www.financialexpress.com/
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