India Steps to the Front of the Line
April 11, 2017
The report to Congress outlining the results of the APA program for 2016, released by the Advance Pricing and Mutual Agreement Program (“APMA”) on March 27th, shows a drop in both the number of requests filed and the number of agreements executed, with executed agreements dropping below 100 for the first time since 2012, when APMA was formed by the merger of the Competent Authority office and the Advance Pricing Agreement program. The drop bears watching over the next few years (i.e., as the effects of the BEPS initiative begin to play out and taxpayers face additional audit activity around the world), but the most noteworthy change in 2016 was the large number of bilateral applications involving India.
According to the report, India represented 34 percent of the new bilateral applications, or 28 of the 84 bilateral applications filed. This is noteworthy because, when India announced its program in 2013, the IRS responded by announcing that it would not accept bilateral APA applications until progress was made on the large number of double tax cases that had been languishing in the Mutual Agreement Procedure (“MAP”) office for a number of years. As a member of the team with responsibility for India double tax cases from 2009 to 2013, I saw firsthand the difficulties involved in reaching agreement with India, so it was not surprising that the IRS was skeptical about accepting APA applications that presumably would suffer from the same difficulties, and move the intractable arguments from after an audit to before.
In early 2015, after the Indian APA program had been up and running and had produced both unilateral agreements and bilateral agreements with the United Kingdom, the IRS announced that it would begin accepting requests for prefiling conferences regarding Indian bilateral APA applications, and throughout 2015 both countries worked on developing a framework for resolving the existing inventory of MAP cases. The IRS announcement in February of 2016 that APMA would begin accepting bilateral APA applications involving India was a welcome development for the many U.S.-based multinational companies that continue to struggle with the Indian Tax Authority’s aggressive transfer pricing adjustments. The Indian Tax Authority announced in December of last year that it had reached a verbal agreement with the IRS on a bilateral APA that had originally been filed as a unilateral request in India, but the IRS cannot confirm that fact because in the United States APAs are treated as tax return information subject to the confidentiality restrictions of IRC 6103.
Nevertheless, the fact that a third of the new APA applications involve India shows that U.S. taxpayers see the program as a reasonable avenue for resolving the types of annual transfer pricing adjustments that have plagued many companies that have established back office operations in India.
Other than the India developments and the dip in completions (which, to be fair, is only slightly lower than all post-merger years except 2015), the picture of the program in 2016 is largely consistent with prior years, and suggests that the APA program remains a valuable tool for taxpayers seeking to resolve transfer pricing disputes before they start.