Opening the new and much-awaited chapter in tackling bulging transfer pricing (TP) disputes, the first advance pricing agreement (APA) in India is set to be signed next month. The officials involved in the process say that, according to the plan, about five unilateral APAs are set to take off in February and the target for the current financial year is to conclude at least 10 such APAs. This clearly means that the international taxation and TP division of the Central Board of Direct taxes (CBDT) has done an impressive job in the last few months as APA applications take time to reach fruition.
Though every APA is different, as it is an agreement between the concerned company and the revenue department, the CBDT has developed a model APA template, which is currently being vetted by the law ministry, to expedite the whole process. Once the APAs are given final shape, each one of them will have to be approved by the finance minister. Clearly, these agreements will remain the final word for taxation of transactions of the companies signing APAs with related entities for the next five years. For the MNCs reeling under high-handed TP adjustments in the last few years, this window is expected to be a big solace.
The numbers pertaining to the TP adjustments till FY13 clearly indicate why a successful APA mechanism is a must in India. While additions to the income of MNCs were made in 49% of the cases totalling R23,237 crore in FY11, the numbers shot up to 53% and R45,385 crore in FY12. And in FY13, the TP adjustment again rose by 54% to R70,016 crore, which included high-profile cases like Microsoft and Maruti. The FY14 TP orders are expected in the first week of February. The APA discussions will certainly have their impact on the TP adjustments, and in turn litigations. Once an APA is signed, the company concerned and the tax authorities would handle the transactions done during the specified period, according to the agreed framework.
In total, 150 APA applications have been filed since its introduction in 2012—119 unilateral and 31 bilateral ones. The unilateral APAs normally take between six months and one year to conclude and are between the company and the revenue authority of the concerned country, and bilateral APAs taking about two years to get done are between the company and the two countries of its operation.