Advance Pricing Agreement : Analysis

What is an Advance Pricing Agreement?

  • APAs are primarily aimed at avoiding transfer pricing disputes arising from cross-border transactions undertaken by MNCs.
  • Through these agreements, tax department and companies seek to resolve transfer pricing disputes in advance before the cross-border related party transaction actually takes place.
  • Its provision was introduced in Income-tax Act, 1961 in 2012 and Rollback provisions to it were introduced in 2014.

 

What are the benefits of such agreements?

  • APAs provide certainty to taxpayers in domain of transfer pricing by specifying methods of pricing and setting prices of international transactions in advance.
  • It gives certainty to MNCs that agree on certain principles in valuation of their cross-border transactions.
  • It also provides them with alternate dispute resolution mechanism with respect to transfer pricing.
  • It helps in determining arm’s length price of international transactions in advance for max period of 5 future years.
  • It also strengthens Government’s resolve of fostering non-adversarial tax regime.
  • It also has significantly contributed towards improving ease of doing business in India and has been appreciated nationally and internationally for being able to address complex transfer pricing issues in a fair and transparent manner.

 

Analysis after entering into APAs:

  • Union Government has received Rs. 3,000 crore of additional tax from MNCs that have entered into advance pricing agreements (APAs) with it over last five years and also has eliminated big source of tax litigation.
  • 219 APAs signed by CBDT has resulted in MNCs accepting extra income of Rs 10,000 crore, translating into tax of Rs 3,000 crore.
  • The rate of completing APAs pacts has slowed down in FY18 compared to year ago.
  • CBDT had signed 88 APAs in FY17 and it has now come down to 67 in FY18.
  • One of the reasons for dip was increasing complexity of cases, which required more time for analysing relevant international transactions.
  • Shortage of manpower at level of additional or joint commissioners and deputy or assistant commissioners in APA teams also has slowed down processing of applications.
  • Despite slowing, India has outperformed China in finalising APAs in last five years.