Advance Pricing Agreement
Advance Pricing Agreement
Advance Pricing Agreement (APA) is an agreement between a taxpayer and the tax authority specifying the Transfer pricing methodology (TPM) for pricing the tax payer’s transactions for future years. The objective of the Advance Pricing Agreement is to provide much-needed tax certainty to multinational enterprises (MNEs) operating in India, particularly on their intra-group transaction and in the process, adopt global best practices. APAs gives certainty to taxpayers, reduce disputes, enhance tax revenues and make the country an attractive destination for foreign investments. In this article, we will look at the Advance Pricing Agreement in detail.
Note on Transfer pricing methodology
The transfer pricing can be stated as the price which is paid for goods or services transferred from one economic unit of an organization to its other units situated in different countries. Any individual who has entered into an international transaction during a previous year is needed to obtain an Accountant’s Report and furnish report before filing the income tax return
Know more about Transfer Pricing
Purpose of the Advance Pricing Agreement
The purpose of the Advance Pricing Agreement is explained in detail below:
- To bring down tax litigation significantly and provide tax certainty to foreign investors
- To provide certainty and unanimity of approach in determining Arm’s Length Price (ALP) of international transactions
- To reduce tax litigation on account of transfer pricing
Scope of Advance Pricing Agreement
Advance Pricing Agreement includes determination of Arm’s Length Price (ALP) or specifies the manner in which Arm’s Length Price is to be determined. The Arm’s length can be determined as per any method prescribed under section 92C of Income Tax Act for determination of ALP along with the necessary adjustments and variation.
Benefits of Advance Pricing Agreement
The benefits Advance Pricing Agreement is explained in detail below:
- APA is designed to help taxpayers by resolving actual or potential transfer pricing disputes cooperatively, as an alternative to the traditional examination process.
- Advance Pricing Agreement programme strengthens the Government’s resolve to fostering a non-adversarial tax regime.
- An Advance Pricing Agreement provides certainty concerning the tax outcome of the tax payer’s international transactions
- The Indian Advance Pricing Agreement scheme has been appreciated nationally and internationally for being able to address complex transfer pricing issues fairly and transparently.
Terms of Advance Pricing Agreement
The Advance Pricing Agreement includes the following things:
- The international transactions covered by the APA
- The agreed transfer pricing methodology
- Determination of Arm’s length price
- Definition of any relevant terms
- Critical assumption
Types of Advance Pricing Agreement (APA):
Advance Pricing Agreement or APA is further classified into various types based on the number of related parties involved
Unilateral Advance Pricing Agreement involves only the taxpayer and the tax authority (CBDT) of the country where the taxpayer is located.
Bilateral Advance Pricing Agreement involves the taxpayer, associated enterprise (AE) of the taxpayer in the foreign country, the tax authority of the country where the taxpayer is located and the foreign tax authority.
Multilateral Advance Pricing Agreement involves the taxpayer, two or more associated enterprise of the taxpayer in different foreign countries, tax authority of the country where the taxpayer is located and the tax authorities of associated enterprise.
Eligibility for Advance Pricing Agreement
The following persons are eligible to apply for the Advance Pricing Agreement:
- The person who has entered into an international transaction
- The person proposing to undertake an international transaction
The validity of Advance Pricing Agreement
The Advance Pricing Agreement (APA) is valid for a period specified in APA, but not exceeding 5 consecutive financial years. APA can be extended or renewed for a further period of up to 5 years
Fee for filing an Advance Pricing Agreement
The fee for filing the advance pricing agreement is based on the amount of international transaction.
|Sl.No||Amount of international transaction||Fee Details|
|1||Amount not exceeding Rs. 100 Crores||Rs.10 Lakhs|
|2||Amount not exceeding Rs. 200 Crores||Rs.15 Lakhs|
|3||Amount exceeding Rs. 200 Crores||Rs.20 Lakhs|
Pre-Filing Consultation for APA
The person proposing to enter into an APA have to make an application in writing for a pre-filing consultation to the Director-General of Income Tax.
On receipt of the request, the team will hold pre-filling consultation with the person. The component authority in India or his representative will be associated in pre-filling consultation involving bilateral or multilateral agreement
The pre-filing consultation includes the following things:
- Determine the scope of the agreement
- Identify the transfer pricing issues
- Determine the suitability of international transaction for the agreement
- Discuss broad terms of the agreement
Advance Pricing Agreement Application Procedure
The taxpayer who desires to enter into an Advance Pricing Agreement has to furnish an application in a prescribed format along with the requisite fee.
The application form for Advance Pricing Agreement is attached here:1031200A00000007772
For Unilateral Agreement
- The application has to be furnished to Director General of Income-tax (International Taxation) in case of unilateral agreement
For Bilateral or Multilateral agreement
- The application has to be furnished to the competent authority in India in case of bilateral or multilateral agreement.
The taxpayer has to provide the following details in the Advance Pricing Agreement:
- Details of international transaction
- Type of APA applied
- Reason for not applying for bilateral or multilateral APA
- Proposed transfer pricing methodology
- Detailed functional analyses
- Consolidated financial statement for five years
Note: The application has to file before the first day of the previous year relevant to the first assessment year for which the APA application is made, in respect of transactions which are of a continuing nature from dealings that are already occurring. The application has to file before undertaking the international transaction in respect of remaining transactions.
- The APA authority after the verification of the application, get additional document or information from the taxpayer. The authority may visit the applicant’s business premises.
- The APA team will carry out the enquiry and prepare a draft report. The DGIT (international taxation) for unilateral agreement or the Component authority of India for bilateral or multilateral agreement and the applicant will prepare a proposed mutually agreed draft agreement.
Cancellation of the Advance Pricing Agreement
An Advance Pricing Agreement can be cancelled on account of the following:
- Failure to comply with terms of APA
- Failure to file an annual compliance report
- Material errors in an annual compliance report
- No consensus on the terms of the revised Advance Pricing Agreement
- The effect cannot be given to rollback provision of an APA due to failure on the part of the applicant
Renewal of APA
The request for renewal of Advance Pricing Agreement can be made by the taxpayer using the same procedure as outlined above except pre-filing consultation.