Advance Pricing Agreement Overview of Indian Provisions & Expectations IFA Conference on International Tax 06-07, July 2012 Mumbai Vishweshwar Mudigonda Deloitte Touche Tohmatsu India Private Limited

© 2012 Deloitte Touche Tohmatsu India Private Limited. Contents Transfer Pricing Disputes and Resolution mechanism Advance Pricing Agreement ‒ Basic Features ‒ Framework in India ‒ Potential Roadmap ‒ Benefits and Challenges ‒ Vital Factors for Success Key Takeaways 2

© 2012 Deloitte Touche Tohmatsu India Private Limited. Transfer Pricing Adjustments – Striking Numerals Trend of adjustments over the years Seven years of transfer pricing audit completed – the trends indicate greater scrutiny, leading to increased adjustments and resultant litigation Facts and figures 3 Asst yearNo of cases Cases adjusted Cases adjusted (%) Estimated addition (in Crores) %1, %2, %3, %1, %10, ,33849%23, ,34352%44,531 Source: White Paper on Black Money from Finance Ministry, May 2012

© 2012 Deloitte Touche Tohmatsu India Private Limited. Historic TP Dispute Strategies Based on Unilateral Options Transfer Pricing DocumentationLocal Country ExaminationAppeals Litigation 4

© 2012 Deloitte Touche Tohmatsu India Private Limited. Recent TP Controversy Strategies Based on Bilateral Options Transfer Pricing Documentation Local or Multiple Country Examination Mutual Agreement Process (Competent Authority) Bilateral APAsTreaty Arbitration 5

© 2012 Deloitte Touche Tohmatsu India Private Limited. APA – Basic features Binding contract with one or more tax authorities ‒ Covers specified intercompany transactions, pricing methods, and range of target results ‒ Generally five-year term (with rollback option) and can be renewed “Critical Assumption” clauses allow renegotiation in the event of changed circumstances ‒ Protects taxpayers from having to comply with a “bad deal” caused by material changes affecting their business ‒ Taxpayers have input in drafting critical assumptions Negotiations with tax authority APA/MAP specialists rather than examination teams Voluntary process – provides taxpayers with principled and non-adversarial alternative to resolving disputes Provides transfer pricing certainty, eliminate potential double taxation 6

© 2012 Deloitte Touche Tohmatsu India Private Limited. APA – Legislative Framework (1/2) APA to be effective from 1July 2012 Board is empowered to enter into an APA To cover prospective transactions Could cover determination of arm’s length price (ALP) or specify the manner in which ALP is determined ALP may be determined under any method whether prescribed or not Validity – Maximum period of five years Legally binding on both parties, except in case of any change in law or fact 7 Board to prescribe detailed rules, forms and procedure

© 2012 Deloitte Touche Tohmatsu India Private Limited. APA – Legislative Framework (2/2) APA to be void in case of fraud or misrepresentation –regular provisions apply Tax authorities get additional time, in case APA is declared void Modified return have to be filed within three months for the past years covered under the APA Assessments / reassessments for the years covered in APA have to be completed in accordance with the APA Reporting Compliances during covered period 8 Pending APA – Compliance and audit to continue

© 2012 Deloitte Touche Tohmatsu India Private Limited Phase 1: APA Planning Phase 2: Pre-filing Phase 3: APA Submission Phase 4: Post- Submission Process Phase 5: Drafting and Compliance APA strategy Fact gathering and analysis Economic analysis Prepare pre- filing documents Pre-filing meetings with tax authorities Prepare and file APA request /submission Acceptance letter Receive/Reply to tax authority questions Second, third round questions Meetings with tax authorities Site visits Position Paper MAP negotiations Finalize APA and sign agreements Adjustments and APA annual reports APA Process – Potential Roadmap 9

© 2012 Deloitte Touche Tohmatsu India Private Limited. APA Phase 1: Planning Establish Transfer Pricing goals Prepare sound TP analysis ‒ Covered transactions ‒ Function and risk analysis ‒ Economic analysis Team building, information readiness ‒ Team with your internal stakeholders and with your external advisors ‒ Leading practice: Internal project champion, liaison to business units ‒ Prepare your “information supply chain,” go-to information contacts 10

© 2012 Deloitte Touche Tohmatsu India Private Limited. APA Phase 2: Prefiling Conferences Pre-filing meetings allow taxpayers to informally obtain tax authority feedback before formally committing to the APA process ‒ May be on a named or anonymous basis ‒ May request more than one meeting as TP analysis is refined Goal - defines Transfer Pricing Methodology feasibility Tax authority informal feedback only a beginning, does not assure outcomes Sets a cooperative tone and builds relationship with the APA team 11

© 2012 Deloitte Touche Tohmatsu India Private Limited. APA Phase 3: APA Submission APA submission content Begins with, but may not end with your transfer pricing documentation Often requires different information, different focus ‒ Documentation looks back, APA forward (and back w/ rollback) ‒ Looking at OECD Guideline perspective and home country perspective ‒ Providing CA analysts negotiation alternatives On-point evidence and organization are crucial ‒ More is not better: On-point evidence crucial and builds credibility ‒ Well-organized submissions read first, started earliest, easiest to process ‒ Well-organized submissions mean fewer follow-up information requests 12

© 2012 Deloitte Touche Tohmatsu India Private Limited. Phase 4: Post-Submission Process (Due Diligence) APA due diligence by the respective tax authorities ‒ Follow-up factual questions ‒ Site-visits ‒ Discuss proposed TP method ‒ Some of the above steps can be done jointly with both tax authorities Use case plans to keep the case moving ‒ Contains due diligence milestones for both the taxpayer and tax authorities ‒ Due dates are negotiated / flexible to accommodate business needs ‒ Importance of keeping on schedule to keep case moving End result – preparation of negotiating position paper 13

© 2012 Deloitte Touche Tohmatsu India Private Limited. Phase 4: Post-Submission Process (MAP Negotiations) Ultimate bilateral resolution is found in the Mutual Agreement Procedure (MAP) process ‒ Government-to-government negotiations ‒ Results in a bilateral “Mutual Agreement” covering the terms of the APA Managing the MAP process ‒ Communicate with both sides frequently ‒ Getting on next MAP meeting schedule ‒ Support both sides with information needed, clarifications ‒ Propose settlement options 14

© 2012 Deloitte Touche Tohmatsu India Private Limited. Phase 5: Drafting the APA and Compliance Drafting the contract with both tax authorities ‒ Boilerplate APA ‒ Understanding adjustment mechanisms Annual reports to demonstrate compliance with APA 15

© 2012 Deloitte Touche Tohmatsu India Private Limited APA – Benefits and Challenges Key Benefits A go forward TPM for at least 5 years Rollback to open audit years possible Significantly reduce penalty risk Defers potential assessments and related cash outlays Provides certainty not otherwise available Generally more objective / experienced APA teams – avoid the “aggressive” auditor syndrome Entry into APA process reduces involvement of a local tax authority office and forces it to accept the APA methodology Greatly reduced TP compliance and audit defense costs Simplifies financial reporting process Possibility of renewal at reduced cost More latitude to negotiate with APA team in order to obtain bilateral agreement Potential Challenges An APA may focus scrutiny on other transactions in the structure and other issues Current transfer pricing policy may be perceived as too high or too low and could be reduced under an APA; No guarantee that proposed methodology will be agreed to Potential requirement to provide more information upfront 16

© 2012 Deloitte Touche Tohmatsu India Private Limited. APA – Vital factors for Success Transparency and open minded approach during negotiation, both by tax authorities and tax payer Should embrace both unilateral and bilateral APA No limiting criteria for applicants of APA Nil or nominal formal filing fee Timely conclusion of APA – 6/9 months for unilateral and 12/24 months for bilateral Provide for roll back option Relief from compliance requirements Confidentiality of information must be maintained 17

© 2012 Deloitte Touche Tohmatsu India Private Limited. Key Takeaways Provides certainty – reduces litigation Facts to be true and complete to the extent possible Offers greater flexibility in determining arm’s length price and latitude to negotiate Critical assumption to mitigate risk of major unforeseen events Co-operation rather than conflict leads to Win-Win approach 18

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