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Advance Pricing Agreements (APA)

Source: PIB

 

Context: Central Board of Direct Taxes (CBDT) has entered into a record 95 Advance Pricing Agreements in FY 2022-23 with Indian taxpayers.

  • With this, the total number of APAs since the inception of the APA programme (2012) has gone up to 516 (420 Unilateral APAs (UAPAs) and 96 Bilateral APAs (BAPAs))
About APADescription
DefinitionIt is an agreement between a taxpayer and a tax authority that sets out how international transactions between related companies will be priced, to avoid any confusion or disagreement about the pricing of those transactions.
ExampleFor example, let’s say Company A in India sells products to its subsidiary Company B in the US. Company A can enter into an APA with the Indian tax authority and the US tax authority to agree on the transfer pricing methodology that will be used to determine the pricing of these products (being sold to its own subsidiary).
Objective·        The main objective of an APA is to keep a check on big multinational companies so that they do not engage in tax evasion by adjusting their profits based on their inter-corporate transactions (transfer pricing).
Guidelines included inIncome Tax Act, 1961
Transfer PricingCharges at which one company provides goods, finance, or services to another related company, based on Arm’s Length principle
Types of APAUnilateral, Bilateral, and Multilateral
BenefitsCertainty in tax liability, minimized audit tasks, reduced cost of administration for tax authorities
TimeAPA helps determine the arm’s length price of international transactions in advance for a maximum of five future years (taxpayer also has the option to roll back the APA for four preceding years = Total of nine years of tax certainty)
Application processFiling an application with DGIT for Unilateral APA, with Competent Authority for Bilateral/Multilateral APA, negotiations carried out by CAs of tax authorities involved.

About CBDT:

The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963. The officials of the Board in their ex-officio capacity also function as a Division of the Ministry dealing with matters relating to the levy and collection of direct taxes.