India saw the introduction of the Advance Pricing Agreement in the year 2012. The Central Board of Direct Taxes came up with this in the year 2012 after it saw a huge number of transfer pricing cases held up in dispute. The Advance Pricing Agreement is supposed to minimize any confusion that pertains to the pricing of international transactions.
APA guidelines were included as part of the Income Tax Act, 1961 and rules 10F to 10T and rule 44GA were inserted in the already existing income tax rules.
Concept of Advance Pricing Agreement:
Advance pricing can be understood as an agreement between a taxpayer and a tax authority fixing the transfer pricing methodology to decide the pricing of future international transactions of the taxpayer. Once the APA is sealed, the methodology decided upon is applied for a certain period of time base on completion of certain terms and conditions.
The idea behind signing an APA is to bring in more transparency and clarity for a taxpayer in terms of tax risks and possible exposure to such risks. Advance Pricing Agreement is purely to foster a more regulated and transparent business atmosphere. APAs do not just serve the purpose of sorting out future transactional issues but in some cases they also declare successful settlement of existing transfer pricing disputes. While we are discussing APAs, another important term that should be defined is Transfer Pricing.
What is Transfer Pricing?
Transfer price can be understood as the charges at which one company makes available goods or finance or services to another company that is related to it. The idea behind transfer pricing is that all transactions between associated enterprises or related companies should be based upon same terms (at an Arm’s length) and conditions as those between unrelated parties. This Arm’s Length principle is an internationally accepted principle which has been accepted by domestic tax legislation of almost all countries worldwide.
Purpose of Advance Pricing Agreement:
The main purpose of transfer pricing and APA is to keep a check on big MNCs so that they do not indulge in tax evasion. Such big companies have subsidiaries and associate companies in several countries and they tend to adjust their profits based on their inter-corporate transactions. These MNCs are known to divert profits out of India by applying various methods that reduce their tax liability in the country. For example, an MNC in India can show higher than actual costs of goods and services purchased from their subsidiaries thereby showing higher expenditure and getting relaxation in tax.
Provisions 92 to 92F of the Income Tax Act directs that such international transactions between associate companies be computed according to Arm’s Length prices so as to avoid any loophole that might get exploited by companies to evade tax.
Types of Advance Pricing Agreement (APA):
Advance Pricing Agreement or APA id further segregated into various types based on the number of related parties involved.
- Unilateral APA:
As the name itself signifies, Unilateral Advance Pricing Agreement involves only the taxpayer company and just the tax authority of the country where the company is located.
- Bilateral APA:
Bilateral APA actually involves four entities in total. First is the taxpayer located in the country. Second is the tax authority of the taxpayer’s location. The third entity is the associated enterprise (AE) of the taxpayer in a foreign country and fourth if the tax authority of the country where the associated enterprise is located.
- Multilateral APA:
A multilateral APA involves multiple entities which get into an agreement about transfer pricing. These entities include the taxpayer in a country, the tax authority of the taxpayer’s company, two or more associated enterprises of the taxpayer and the respective tax authorities of the countries where these AEs are located.
Benefits of Advance Pricing Agreement (APA):
Advance Pricing Agreement appears to be a complicated topic when it comes to understanding it completely. However, it plays an extremely significant part in helping tax authorities keep tax evasion under check. Let us look into some of the most significant benefits of APA.
- The very first benefit of APA is the purpose for which it was rolled out, that is, to check evasion of taxes. APAs offer certainty in terms of the tax liability of taxpayer’s foreign transactions by the application of Arm’s Length Pricing technique to decide upon the prices of international transactions.
- Following the APA guidelines minimizes the time and effort that goes into audit tasks. This removes the threat of audit for an enterprise taxpayer who has business across several countries.
- As for tax authorities in various countries, the formulation and application of APAs removes extra pressure on their resources and reduces the cost of administration as well.
Application for Advance Pricing Agreement (APA):
For instating an APA, any taxpayer needs to file an application first. For unilateral APAs, application needs to be made to the Director General of Income Tax (DGIT) of International Taxation. Similarly, applications for a Bilateral APA and Multilateral APA are to be made to the Competent Authority or the CA in India. This application is then sent to the DGIT by the CA and is handed over by the DGIT to the respective APA teams.
For BAPAs and MAPAs, the CAs of the tax authorities of the countries involved carry out negotiations about the pricing agreement in accordance with the tax treaties that exist between those countries.
Frequently Asked Questions:
Who needs to apply for an APA?
Any taxpayer who is involved in international transactions or is contemplating getting involved in one is required to file for an Advance Pricing Agreement.
Can an APA be rejected by the tax authorities?
The tax authorities generally communicate any discrepancy that prompts them to not accept an APA. The tax authorities may show and communicate in written form their disagreement towards a certain methodology suggested by the applicant as a result of pre-discussion.
Is it possible to maintain anonymity in case of ore-filing discussion?
The extent of information that requires to be furnished may not keep the entire pre-filing discussion totally anonymous. But to a certain extent, a taxpayer can choose to withhold furnishing name of the company etc. during the pre-filing stage.
What is the application fee for filing an Advance Pricing Agreement?
The APA fees is charged right at the time of filing. Here is the structure of fees that is applicable.
International transactions Value (in approx. USD) APA filing fee (in approx. USD) Value 20,000 Value > 20 million 30,000 Value > 40 million 40,000
Apart from the above listed initial charges, any proposed amendment to an APA application that includes addition of certain other transactions is charged separately as an additional fee. This additional fee is in proportion to the increase in the total value of transactions as compared to the earlier proposed total value.
Can an APA be amended to include changed points once it is filed?
Yes. An APA application can be amended when a change request is made in written, before the APA agreement is finalized.
What is meant by Associated Enterprises or AE?
Associated Enterprises are companies with any of the following features:
- Any company involved in the control or capital or management of any other company
- Any person in one company involved directly/indirectly in the management or control or capital of any other company
- Any company that fulfills the definition of an Associated Enterprise as per the provisions listed in Section 92A of the Income Tax Act.
Are separate APA applications required for each and every Associated Enterprise of a taxpayer?
Most of the time, it is understood as an international norm that details of all Associated Enterprises and international transactions will be furnished in a single APA and hence, separate APA applications for different AEs are not expected. In cases where the AEs are located in different countries the APA can be made as a Bilateral or Multilateral agreement.
Are the finalized APAs available in the public domain?
APAs are taxpayer specific documents and hence these are not made available in the public domain.
Can I get an APA renewed?
Yes. Renewal of APA is an easier task than getting a new APA made. The standard process except for the pre-filing discussion remains the same and the renewal application is considered at par with any of the fresh APA applications.
Do the Indian Revenue Offices have access to the APA documents and applications?
No. Currently, there is no provision to share any information regarding application, withdrawal or cancellation of an APA, with the Indian Revenue Authorities or the transfer pricing officer.
During the pre-filing discussions, who can appear before the APA team to negotiate?
The taxpayer who has applied for the APA or any authorized representative can appear before the APA team for negotiations.
Who all are the people that form the APA team?
An APA team consists of officers from the Income Tax Department as authorized by the Central Board of Direct Taxes (CBDT). These are people who are experts in law, economics, statistics or any other field as nominated by the DG-IT.