Transfer pricing (TP) has emerged as the pre-eminent international taxation issue worldwide, including in India. Advance means of agreement on TP issues has become a critical element. This is plainly illustrated by the willingness of even the most recalcitrant countries to embrace the adoption of advanced pricing agreements (APAs) and similar programmes. Interestingly, the United Nations had suggested that developing countries not adapt APA programmes as they begin to implement TP regimes. This is largely due to the perception that their tax authorities lack the experience to deal with such issues.
The legal framework that has evolved to deal with TP matters is the same throughout the world. The OECD guidelines on TPs are demonstrative of the experience of its members over many years. The parameters of the applicable law in most countries and procedures are consistent with the OECD guidelines. Globally, TP disputes are the principal subject of international tax controversies. Why should a contentious dispute arise if the underlying law is essentially the same in all countries? The answer is that TP issues are factual in nature and often applied differently in each country. The appropriate resolution of an issue in one situation may be different from the same issue’s resolution for another taxpayer in the same business.
The concept of the APA is to provide a means by which taxpayers and tax administrations can voluntarily agree on TP issues. This process may be bilateral in nature and include the tax administration of other countries in which the taxpayer and its associated enterprises have transactions (provided a treaty relationship exists between the countries). This way, a range of issues can be resolved. The advance dispute-resolution mechanism is beneficial to both taxpayers and tax administrations because complex factual issues can be resolved, forestalling the time-consuming and expensive process of a comprehensive tax examination that can involve controversy, litigation, appeals, etc. In theory, the time and expense on both sides over the years should be significantly reduced through such procedures.
The Indian APA programme is expected to provide an opportunity to resolve TP issues in advance. Ever since the launch of the programme in 2012, there has been an enthusiastic response from taxpayers. The uncertain and unpredictable domestic tax law litigation process makes the APA programme an attractive option for managing TP controversy.
While Indian APA rules provide for bilateral APAs, the trend has largely been towards seeking unilateral APAs, which may, however, present