Transfer pricing perspectives: Winds of Change - PwC

Despite the increasing popularity in somecountries in the region, there are stillcountries in APAC which do not provideformal APA guidelines or have as muchexperience in APA negotiations such asIndia and Indonesia. In these territories, arobust strategy to building the case beforethe tax authorities is imperative. India andIndonesia for example, are well-known tobe aggressive on the audit front for transferpricing matters. To the extent available,the APA mechanism would thereforeprovide an important avenue to taxpayersto manage their transfer pricing risks inthese territories.However, the formal APA regime in Indiais still being designed. The proposed draftDirect Tax Code which will replace theexisting Income Tax Act (and is proposedto be effective from April, 2012), includesprovisions for taxpayers to apply for anAPA. The tax advisory community ofwhich PwC has been at the forefrontof discussions has been pushing thegovernment to incorporate global bestpractices in drafting the APA rules. Whilethe currently proposed draft legislation issilent on the matter, senior governmentofficials have expressed a view that Indiamay include a bilateral APA mechanismwhich would be welcomed by tax directorsof MNCs operating in the region.On the other hand, the IndonesiaDirectorate General of Taxes (DGT)released APA regulations in Indonesia on 31December 2010, providing some guidanceto taxpayers on the application of andprocess for APAs in Indonesia. Based oninteractions with the Indonesia Taxationoffice (ITO) to date, it is clear that the ITOis keen to implement the APA mechanismand anticipates success from the process.Based on this, it can be expected thatgiven the increase in local transfer pricingdisputes involving increasingly complexissues in the region, many MNCs will beconsidering adopting a proactive approachto managing their transfer pricing risk.In this increasingly complex environmentwith an intensified transfer pricingcompliance focus by tax authorities, MNCsare wise to consider a strategic approachto managing their risks. As a key plankto these strategies, tax directors shouldconsider using APAs as a way to seekcertainty and reduce the risk of doubletaxation in the region.Despite the increasing popularity in some countriesin the region, there are still countries in APAC whichdo not provide formal APA guidelines or have asmuch experience in APA negotiations such as Indiaand Indonesia62 Transfer Pricing Perspectives. October 2011