Advance pricing agreements (APAs)

ECONOMY / GOVERNANCE

Topic: General Studies 2,3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development.
• Tax Administration

Advance pricing agreements (APAs)

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. 

An APA can be unilateral, bilateral, or multilateral. They can be entered into for prospective periods and also cover historical years. 

Benefits of APA are as follows

• Proactive Tax payer: APAs involve discussing inter-company transactions with the tax administration on a proactive basis to agree on pricing terms and eliminate any subsequent controversy. 
• Reduces Compliance Costs: For taxpayers, they carry the benefits of freedom from onerous documentation and tax authority audits, mitigating double tax in some cases and certainty for the business.
• Reduces Government Expenditure: The government stands to gain through reduced disputes, redirection of scarce administration resources and collecting their fair share of tax 
• Attracts Foreign investors: APAs boosts country’s attractiveness to investors by providing a definite and predictable policy regime.
• Good Precedence: India’s APA programme introduced in 2012 has been successful and appreciated by taxpayers and tax administrations globally. The APA annual report for 2018-19 released by the CBDT in November 2019 said 271 agreements yielding Rs 10,000 crore had been signed in six years of filings.
• Non-adversarial Tax regime: The last 12 months have seen additional APAs being signed. This has reinforced the government’s commitment to a non-adversarial tax regime.
• Helps businesses tide Economic Uncertainties: For taxpayers, APAs are even more relevant in these times because business-driven restructurings and changing transfer pricing policies can be a compelling reason to pursue APAs. 
• Helps avoid litigation: With limited resources, companies can choose to invest in getting certainty through APAs as a cost-effective alternative to uncertain and long drawn litigation.
• Indicates Collaborative Approach of government: APAs are a credible example of how Indian tax authorities and taxpayers have collaborated to find solutions to vexing transfer pricing problems.