Advance Pricing Agreements (APAs), likely to be announced in the coming Budget to reduce transfer pricing disputes, may give companies an option to go for bilateral arrangements with tax authorities in India and in the country where their group company is based.
The agreements, however, will be signed only with companies from those countries having a Double Taxation Avoidance Agreement (DTAA) with India.
An APA is an ‘ahead of time agreement’ between a taxpayer and a taxing authority, on an appropriate transfer pricing methodology for some sets of transactions at issue over a fixed period of time. These could be bilateral or multilateral—that is, they could include agreements between the taxpayer and one or more foreign tax administrations under the authority of a mutual agreement procedure specified in income tax treaties.
A finance ministry official said the APA rules would have a provision for both unilateral APAs (between the taxpayer and the tax authority in India) and bilateral APAs. Most taxpayers would prefer bilateral APAs because they reduce the risk of double taxation by taking into account the tax liability of associated enterprises in other tax jurisdictions, the official added.
APAs, which determine the pricing of transactions between foreign-based multinational companies and their group company in India, were proposed under the Direct Taxes Code. The ministry is likely to introduce these from the next financial year. The government will benefit by getting the tax without any litigation and reducing administration costs.
Such agreements may initially be signed for at least three years and for a maximum of five years, ensuring future tax certainty, as compared to the current practice where the tax department and the payer often get into a transfer pricing dispute. The government made an additional tax demand of about Rs 40,000 crore in 2011-12 from such cases, compared with Rs 20,000 crore in the previous year.
“Under bilateral APAs, a taxpayer would know his tax liability in each jurisdiction. Since the negotiations will be held under the Mutual Agreement Procedure, bilateral APAs will be signed only with countries that have a DTAA with India,” said the official, adding that APAs would encourage more foreign investment. The ministry has already started putting in place a mechanism to this effect.
According to a Deloitte report, a number of countries began entering into APA schemes through the 1990s. The end of that decade saw the UK, Belgium and France introduce their APA schemes. This was followed by other European countries such as the Netherlands, Germany and Spain, and the spread of APAs to South American and Asian countries in the last decade. In the US, bilateral APAs are the highest in number against unilateral and multilateral APAs.
APAs are meant for complex transactions within a group business. These are usually favoured by large companies because getting into an APA is a time-taking and costly process. Earlier, the government was considering safe harbour rules for other taxpayers who cannot afford APAs, but the idea has been put on the backburner due to wide differences within the government and also with industry over such rules. Safe harbour rules mean the tax authorities accept the results of taxpayers who meet certain conditions and the latter are then not subjected to detailed scrutiny.
