Advance Pricing Agreement

Prelims & Mains

Advance Pricing Agreement (APA) program allows the taxpayer and the tax authority to avoid future transfer pricing disputes

Advance Pricing Agreement (‘APA’) programme has been operational in a number of countries and was launched in India in the year 2012.

The primary goal of such a programme is to provide certainty to taxpayers in respect of the cross-border transactions undertaken by such taxpayers with their group entities.

Advance Pricing Agreement can be multilateral or bilateral i.e., involving the Central Board of Direct Taxes (‘CBDT’) and the tax authorities of one or more countries or unilateral i.e., involving the CBDT only.

While an Advance Pricing Agreementis a mechanism to resolve transfer pricing disputes in advance i.e., before the cross-border related party transaction has actually taken place, in 2016, roll-back provisions were also introduced, which allowed the taxpayer to roll-back the results of the signed Advance Pricing Agreement.

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Advance Pricing Agreement – Background

One of the disputed issues in taxation related to MNCs is the area of intra company transactions. The pricing of goods and services between two related companies is called transfer pricing.

Here, a parent company say in Japan may charge a convenient price from its subsidiary in India to minimise its tax payment in India. For example suppose that Maruti Suzuki India has higher profit and has to pay higher tax to the Government of India.

In this case, if Suzuki Japan charges a high price for a component it sold to Maruti, profit of Maruti will come down and the tax payment of the company to GoI will also come down. On the other hand, the revenue of Suzuki Japan will go up. Altogether, the Suzuki Motor Coroporation (SMC) who owns India’s Maruti improves is position; but GoI’s tax revenue affected.

To avoid such a manipulation, tax department of India presets the price charged for different components between Maruti and SMC. At the beginning of a year, the price charged for intra company transactions will be determined in advance and will be kept for the coming five years or so. This price arrangement between Maruti and India’s tax department is called advance price agreement.

An Advance Pricing Agreement is a contract, usually for multiple years, between a taxpayer and at least one tax authority specifying the pricing method that the taxpayer will apply to its related-company transactions. These programmes are designed to help taxpayers voluntarily resolve actual or potential transfer pricing disputes in a proactive, cooperative manner, as an alternative to the traditional examination process.

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Advance Pricing Agreement – Benefits

APAs gives certainty to taxpayers, reduce disputes, enhance  tax revenues and make the country an attractive destination for foreign investments. These agreements would be binding both on the taxpayer as well as the government. Similarly, they lowers complaints and litigation costs

The Advance Pricing Agreement (APA) program allows the taxpayer and the tax authority to avoid future transfer pricing disputes by entering into a prospective agreement, generally covering at least five tax years, regarding the taxpayer’s transfer prices. APAs specify:

  • Transactions covered by the APA
  • Transfer pricing method (TPM)
  • APA term
  • Operational and compliance provisions
  • Appropriate adjustments
  • Critical assumptions regarding future events
  • Required APA records
  • Annual compliance reporting responsibility

Bilateral vs. unilateral APAs

Taxpayers may enter into APAs with more than one tax authority – i.e., bilateral or multilateral APAs – through the mutual agreement procedure (MAP) included in most income tax treaties. Unilateral APAs involve agreements between only the taxpayer and one government.

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Advance Pricing Agreement – Highlights

A total of 815 applications have been filed until March 31, 2017, out of which 706 represent the Unilateral APAs (‘UAPAs’) and 109 represent Bilateral APAs (‘BAPAs’).

The table below gives the break-up of the number of applications filed each year since the inception of this programme.

 

Financial Year (F.Y.) UAPA BAPA Total
2012-13 117 29 146
2013-14 206 26 232
2014-15 192 14 206
2015-16 113 19 132
2016-17 78 21 99
Total 706 109 815

 

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Raja Raja Cholan
About Raja Raja Cholan 587 Articles
Trainer & Mentor for aspirants preparing for civil service examination

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