WITH THE GLOBALISATION OF BUSINESS environment, international dealings between related parties in goods, services, funds, intangibles have been markedly increasing over the past decade. This leads to increased scrutiny of transfer prices and presented challenges for taxpayers and tax authorities. Many tax jurisdictions have recognised the significance of transfer pricing and introduced advance pricing agreement (APA) mechanism in order to address the above issues. 







    Since the introduction of transfer pricing regulations in 2001, India, like any other tax jurisdiction, has experienced significant controversies and unresolved disputes. In such a situation, introduction of APA, as proposed in the draft Direct Taxes Code, would provide certainty to taxpayers and reduce litigation costs. 







What is an APA? 







APAs are arrangements that determine, in advance of controlled transactions, an appropriate set of criteria for determination of the transfer price for those transactions over a fixed period of time. APA has been defined by the Code to mean an agreement between the taxpayer and tax authorities for the upfront determination of the arms length price in relation to an international transaction. 







    Generally, an APA can be concluded either bilaterally (multilaterally), which means it is binding on the tax authorities and the tax administration of another countries, or unilaterally. A unilateral APA is concluded between the tax authorities and a taxpayer, but does not guarantee the agreement of the other tax administration. 







    The objectives of an APA process are to provide an opportunity for both tax authorities and taxpayers to consult and cooperate in a non-adversarial spirit and environment, facilitate principled and practical negotiations, resolve transfer pricing issues expeditiously and prospectively. Further, bilateral and multilateral APAs substantially reduce or eliminate the possibility of juridical or economic double or non-taxation. An APA may cover many different types of international dealings between related parties, including transfers of tangible or intangible property, services, cost contribution, global trading, profit attribution, global manufacturing etc. 







    Globally, developed countries such as the US, Canada, France, the UK, Australia, Japan as well as other nations such as China, Korea, Taiwan, Thailand, Mexico etc. have not only included APA as part of their tax legislation but also successfully implemented such mechanisms. Most of the countries prefer bilateral or multilateral APAs as they are likely to ensure that the arrangements will reduce the risk of double taxation, will be equitable to all tax administrations and taxpayers, and will provide greater certainty to the taxpayers. 







    APAs have prospective application only, generally for tax years beginning after the date of execution of the APA and will be of limited, specified duration – usually 3 to 5 years. However, in practice, a few jurisdictions provide rollback application of such concluded APAs to tax years prior to those covered by the APA. 







    For the purpose of ongoing administration of concluded APAs, certain jurisdictions contain a concept of filing of annual reports by the taxpayers to demonstrate the extent of compliance by the taxpayer with the terms and conditions of the APA and to ensure that the critical assumptions relating to such concluded APA remain relevant.







Shortcomings of APA 







Although APAs considerably reduce the taxpayers uncertainty regarding arms length pricing of international transactions, but they are not without certain limitations: 







Unilateral APAs may lead to economic or juridical double taxation for the MNE group. 







    APA programme may initially place a strain on the skilled resources, as tax authorities might have to divert resources earmarked for the APA programme. 







Information obtained in an APA might be misused. 







    APA cannot be used by all taxpayers because the procedure can be expensive and time-consuming and small taxpayers generally may not be able to afford it. 







Going forward 







APA mechanism has been introduced in India with a view to providing certainty to the taxpayers in respect of their tax liability arising from any future international transaction. The idea is that the Board will give due consideration to the aspects associated with APA mechanism before notifying the applicable rules, such as: 







    Confidentiality of data/ information of the taxpayer. 







    Introduction of bilateral/ multilateral APAs from inception. 







    Possibility of adopting a special APA mechanism for small taxpayers. 







Working agreements with the competent authorities of other countries for the undertaking of APAs. 







Possible retro-active application of APA to tax years prior to those covered by the APA.