Indian Advance Pricing Agreement regime moves forward
What is the issue ?
- The Central Board of Direct Taxes (CBDT) has entered into five Unilateral Advance Pricing Agreements (UAPA) and two Bilateral Advance Pricing Agreements (BAPA) during the month of January, 2018.
Status of Advance Pricing Agreements in India :
The total number of APAs entered into by the CBDT has gone up to 196.
This includes 178 Unilateral APAs and 18 Bilateral APAs. In the current financial year, a total of 44 APAs (7 Bilateral and 37 Unilateral) have been signed till date.
Advance Pricing Agreements in January :
- The 7 APAs entered into during January, 2018 pertain to various sectors of the economy like Banking, Insurance, Investment Advisory, Information Technology, Chemicals and Engineering.
- The international transactions covered in these agreements include provision of IT enabled services, provision of software development services, contract manufacturing, payment of royalty, sale of goods, etc.
What are Advance Pricing Agreements ?
- An APA is an agreement between a tax payer and tax authority determining the transfer pricing methodology for pricing the tax payer’s international transactions for future years.
- The methodology is to be applied for a certain period of time based on the fulfillment of certain terms and conditions (called critical assumptions).
What are the different types of APAs?
An APA can be unilateral, bilateral, or multilateral.
- Unilateral APA: an APA that involves only the tax payer and the tax authority of the country where the tax payer is located.
- Bilateral APA: an APA that involves the tax payer, associated enterprise (AE) of the tax payer in the foreign country, tax authority of the country where the tax payer is located, and the foreign tax authority.
- Multilateral APA : an APA that involves the tax payer, two or more AEs of the tax payer in different foreign countries, tax authority of the country where the tax payer is located, and the tax authorities of AEs.
When were Advance Pricing Agreements introduced in India ?
- Advance Pricing Agreement (APA) provisions were introduced in the Income-tax Act, 1961 (Act) w.e.f. 1 July 2012. The rules in respect of the APA scheme have been notified by the Central Board of Direct Taxes (CBDT)
What are the key benefits of APA?
- Certainty with respect to tax outcome of the tax payer’s international transactions, by agreeing in advance the arm’s length pricing or pricing methodology (ies) to be applied to the tax payer’s international transactions covered by the APA.
- Removal of an audit threat (minimize rigours of audit), and deliverance of a particular tax outcome based on the terms of the agreement
- Substantial reduction of compliance costs over the term of the APA
- For tax authorities, an APA reduces cost of administration and also frees scarce resources.