APA rules to help reduce transfer pricing disputes
In a move to prevent transfer pricing disputes, the Government on Friday announced operational guidelines for Indian advance pricing agreements (APA).
The rules, seen as an important milestone in the transfer pricing regime, will guide companies on pricing cross-border movement of goods and services in advance for the purpose of calculating taxes, within group entities.
The concept of APA was introduced in the Budget 2012-13, which incorporated the basic framework in the law on the lines contained in the draft Direct Taxes Code.
The Central Board of Direct Taxes was empowered to lay down the detailed framework for India’s APA programme.
This has now been done and the Indian APA programme allows for bilateral and multilateral arrangements. Unilateral APAs will be decided by the office of the Director-General of International Tax.
An APA is an agreement between a taxpayer and the tax authority concerning the transfer pricing method and the rate applicable to the taxpayers’ inter-company transactions, and normally covers multiple years.
Once an APA is in place, the tax authority cannot make arbitrary adjustments to the transfer price, as long as it is valid.
The rules prescribe minimum filing fee of Rs 10 lakh per application for all international transactions up to Rs 100 crore.
For international transactions between Rs 100 crore and Rs 200 crore, the fee is Rs 15 lakh. For transactions above Rs 200 crore, the filing fee has been pegged at Rs 20 lakh.
According to APA rules, every company which is proposing to enter into such an agreement has to necessarily attend a pre-filing consultation with the income tax authorities.
This pre-filing consultation can also be on a no-name basis if the company is not willing to share all the details at this stage.
Once the company enters an APA, it is absolved of future litigation and lot of compliance procedures.
Tax experts hail rules
“APA rules will not only help reduce transfer pricing litigation but also prevent disputes, especially in Indian situation when adjustments are relatively higher and appeal process is longer,” said Samir Gandhi, Partner, Deloitte, Haskins & Sells.
India is the third highest jurisdiction with pending transfer pricing disputes, according to recent Ernst & Young Global Transfer Pricing Survey 2012.
Amit Maheshwari, Partner Ashok Maheshwary & Associates, described the cost notified for applying for an APA as “prohibitive”. He felt that it will discourage small and medium taxpayers from using this route to reduce dispute.
Amit Singhania, Principal Associate, Amarchand & Mangaldas, said that pre-filing consultation with tax authorities will give enough opportunities to the taxpayer to decide whether to proceed with APA or not.
The Indian APA scheme clearly rubs shoulders with the best practices in countries with established APA programmes, said Kunj Vaidya, Associate Director, Price Waterhouse & Co.