Advance Pricing Agreement (APA) – Types and Benefits

Advance Pricing Agreement was introduced in India by the Central Board of Direct Taxes in 2012 to minimise the dispute in the transfer pricing structure in India which required the Arm Length Price (ALP) for every international transaction. It was instituted by Finance Act, 2012 by adding section 92CC and 92CD that shall be read with rules 10F to 10G and rule 44GA.

What is Advance Pricing agreement (APA)?

The Advance Pricing Agreement is an agreement between CBDT and taxpayer to fix the transfer pricing policy to resolve the future international pricing transaction of the taxpayer. After the APA is fixed, the policy is applied for a definite period with certain terms and conditions. The purpose to sign APA is to promote transparency for taxpayers with regards to tax risks and to avoid such risks and to have a check on tax evasion by big MNCs working on international level.

What are the Objective of APAs?

 APAs is applied for different international transactions:

1. In selling and purchasing finished goods and raw materials,
2. To provide the financial assistance and services,
3. To use and allocate tangible and intangible assets, etc

What are the types of Advance Pricing Agreement?

According to Rule 10F there are three types of Advance Pricing Agreement:

1. Unilateral agreement – It means an agreement between the authority of tax and the taxpayer applicant or company from where the company is situated.

•  Bilateral agreement – It is the agreement as given under Rule 44GA made earlier between the Indian competent authority with the competent authority in the different country concerning the utmost suitable transfer pricing method and then on that basis any agreement made between the tax authority and the taxpayer. Hence, there are four entities involved in bilateral agreement.

• Multilateral agreement – It involves multiple entities means an agreement as given under Rule 44GA made earlier between the Indian competent authority with the competent authorities in the different countries concerning the utmost suitable transfer pricing method and then on that basis any agreement made between the tax authority and the taxpayer.

What are the benefits of Advance Pricing Agreement?

Few benefits of Advance Pricing Agreement are:

1. The benefit of APA is to control and check tax evasion by taxpayers.
2.  APA gives surety regarding the taxpayer’s liability in their foreign transactions by applying Arm’s Length Pricing method to agree on the prices of the international transaction.
3. The application and the formulation of the Advance Pricing Agreement remove the burden on the tax authorities of different countries for maintain their resources and has also reduced the cost of their administration process.
4.  The APA framework reduces the effort and time taken in doing the audit tasks. This has removed the risk of audit for taxpayers who is doing business across numerous countries.

Conclusion

Although the Advance Pricing Agreement is valid for five succeeding years but it can also be valid for the period as the parties has declared in the agreement. Therefore, APA is a great initiative to avoid double taxation, tax evasion and has brought transparency in payment of tax by the taxpayers.