Question

What is the advanced pricing agreement? How will it bring down Tax litigations?

Answer 1

Approach:

• Briefly Explain what is APAs.
• Then highlight in short how Transfer pricing issues results in litigations.
• Discuss how APAs have been successful in bringing down litigations.

Advance Pricing Agreement (APA)
Advance Pricing Agreement (APA) is an agreement, in which the taxpayer enters into an upfront agreement with the tax administration regarding the arm’s length price of its international transactions with related parties. The international transactions are complex and involve more than one country. The sole objective of the APA is to bring tax certainty in international transactions and overcome the issues due to transfer pricing between related parties.By related parties, we mean to say that one party is a holding, subsidiary or an associate company of another party.

Transfer Pricing and Litigations
The Indian tax administration has been proactive in the past few years in its attempts at reducing tax litigation. The major source of disputes in direct taxes is transfer-pricing (TP). Transfer-pricing litigation clogs up appellate channels and takes much more time to resolve since, in many cases, the appellate tax tribunals restore the disputed issue back to the transfer pricing officer as a number of facts and nitty-gritty need further re-examination. This starts another chain of appeals, further delaying an already fraught process. This leads to wastage of resources and time.

APAs and Reduction in Litigations
Transfer-pricing disputes need a targeted approach in order to reduce the onerous litigations which impact the ease of doing business in India. The Government has introduced the Advance Pricing Agreement (APA) Scheme in 2012. The introduction and efficient implementation of the scheme has been a successful initiative in preempting transfer-pricing litigation. The tax administration has entered into several bilateral APAs since then, of which the bulk (70) have been signed last year and in the current year.

• Provides Certainty: The efficient implementation of the APA programme in recent years has helped corporates attain certainty regarding their related-party transactions for up to five years in the future with an option to roll it back to cover four earlier years.
• Adjudication Bases on agreed principles: Tax tribunals have also started adjudicating taxpayers’ pending transfer-pricing litigation based on the agreed principles embodied in the APA even though the APA may not cover the period in question.
• Saves Resources: Every APA agreement represents tax certainty for a taxpayer and avoidance of resources spent on litigation by both the taxpayer and the tax administration. These resources can be further used to enhance/improve the tax structure.
• Gains from the Negotiation process: The learning’s from the APA negotiation exercises can be used to preempt disputes in other cases also. While the individual details of an APA remain confidential, guidance from the tax administration by using the principles and methodology from APAs signed with taxpayers can be a quick and efficient way to preempt litigation on major transfer-pricing issues.

Transfer-pricing is a fact-intensive exercise and guidance issued by the tax administration can help nip many potential disputes in the bud. APAs lowers complaints and litigation costs. APAs gives certainty to taxpayers, reduce disputes, enhance tax revenues and make the country an attractive destination for foreign investments.