Government establishes APA regime for transfer pricing

The Central Board of Direct Taxes (CBDT) has announced guidelines for advance pricing arrangements (APAs), which would help reduce disputes on transfer pricing between the tax authorities and multinational corporations.

MNCs can now ascertain in advance the potential tax liabilities relating to transactions with their Indian units, helping reduce disputes over transfer pricing. The APA agreement will enable the tax department and the MNC from agreeing in advance on the method for determining transfer pricing for transactions between the parent firm and its Indian unit.

The government had in the budget earlier this year announced the setting up of such a mechanism to avoid disputes with transnational corporations. The APA directorate has now been set up, enabling MNCs to enter into agreements with tax authorities.

The absence of such an agreement had in the past led to several disputes with international firms and hefty claims by the tax authorities. Over the past two years, the directorate of transfer pricing in the CBDT has claimed to have detected mispricing of more than Rs1.1  lakh crore.

According to experts, more than half of the tax litigation in the country relates to transfer pricing. The concept relates to the pricing of assets, services and funds transferred within a company in a cross-border transaction. Tax authorities in several countries are quite strict with transfer pricing to avoid transfer of income from high-tax countries to low-tax ones.

The new APA regime will comprise unilateral, bilateral and multilateral programmes. Under the agreement, which is voluntary, companies and the tax department will agree on an arm's length price, covering cost plus a margin. The agreement will be valid for five years.