Advanced Pricing Agreements

Why in News?

The Central Board of Direct Taxes (CBDT) has signed five more unilateral advance pricing agreements (APAs) with Indian taxpayers.

 

FACTS FOR PRELIMS

APA Scheme

An advance pricing agreement (APA) is an ahead-of-time agreement between a taxpayer and a tax authority on an appropriate transfer pricing methodology (TPM) for a set of transactions at issue over a fixed period of time (called “Covered Transactions”).

The concept of Advanced Pricing Agreement (APA) was introduced in India via the Finance Act 2012.

To avoid uncertainty, a principle of arm’s-length price (ALP) is used to decide what price should be charged by related parties, that is, the price two unrelated parties would charge under similar circumstances.

The APAs may be bilateral or unilateral. When the competent authorities of two countries negotiate in advance to determine the ALP of the future international transaction, it is called bilateral APA.

On the other hand, sometimes, taxpayers may like to go for unilateral APA, to have an agreement only with one government authority to have tax certainty in that country. This is called Unilateral APA and it is generally done when there is no DTAA/DTAC between the two countries or that the taxpayer is only looking for tax certainty in one country.

Significance

APAs bring tax certainty, reduce litigation expenses and avoid the risk of double taxation. An APA brings extra revenue to the tax administration.

 

Source-The Economic Times