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.
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.
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.
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|
- Till date, a total of 152 applications have been signed (141 UAPAs and 11 BAPAs). It is an interesting comparison to ponder upon, that while India has concluded 152 APAs in the past four years, China has entered into 113 APAs in ten years i.e., from 2005-2014.
On an average, India has been successful in concluding the UAPAs in 29 months and the BAPAs in 39 months as compared to its US counterparts, which took an average of 34 months for UAPAs and 51 months for BAPAs.
The Indian Advance Pricing Agreement programme has matured over the past five years and the number of agreements getting signed is a testimony to that. The programme is poised to move ahead quicker than it has done so far.
The CBDT has also recognised the importance of some unique aspects that have contributed to the growth of Advance Pricing Agreement programme i.e., the faith entrusted by the taxpayers in the APA team, use of electronic mode of communication, confidentiality maintained by Advance Pricing Agreement team as well as taxpayers etc. All this augur well for both the taxpayers and the tax administration in India.