The tax authorities around the globe know that every businessman looks for ways to pay fewer taxes. To reduce the amount of taxes flowing from their pockets, they take the help of various methods. Advance Pricing Agreement in India is set up between any tax authority and the taxpayer for better reassurance between them.
APA is usually set up for multiple years to specify the pricing method that the businessmen are supposed to apply to their company-related transactions. These contracts are designed to help the businessmen pay their taxes voluntarily in a proactive manner. This concept was introduced in the market via the Finance Act 2012 with the sole objective of bringing tax certainty in the international transactions and overcome the issues caused due to transfer pricing between related parties.
Common Queries About Advance Pricing Agreement India
- What are the different types of APAs?
The Advance Pricing Agreement in India is of three types, Unilateral, Bilateral and Multilateral.
- Unilateral: An APA which involves only the tax authority and the taxpayer or businessman.
- Bilateral: An APA which involves the tax authority where the taxpayer is located in, the taxpayer, the associated enterprise of the taxpayer in a foreign country and the foreign tax authority.
- Multilateral: An APA involving the taxpayer, two or more associated enterprises of the foreign countries, tax authority of the country where the taxpayer is located in, and the tax authorities of the associated enterprises.
- What are the key benefits of APA?
APA provides the following set of advantages :
- APA is known to reduce the cost of administration and free out scarce resources.
- There has been seen a substantial reduction in the compliance costs over the term of APA.
- APA can remove the audit threats and deliver a particular tax outcome on the basis of terms in the agreement.
- Advance Pricing Agreement in India is known to bring in the certainty in the outcome of international transactions by agreeing to pay the arm length pricings in advance.
- Can the tax authorities reject the application based on the outcome of pre-filing discussions?
The discussion would not bind the Central Board of Direct Taxes with the taxpayer to either enter or initiate the process of APA. However, there’s a possibility that in the pre-filing consultation meeting the authorities might indicate their reluctance to approve the methodology proposed as it could influence the negotiations. Plus, many taxpayers have the opportunity to enter the consultation process on a no-name basis too.
- What is the procedure of filing an APA?
The application for the unilateral type is made directly to the director-general of the income tax department. The bilateral and multilateral applications must be submitted to the Competent Authority of India. The application would be then sent to the Director-General who will then send it to the respective APA team.
- Will the tax authorities hold regular audits during the negotiation process?
The executed agreements are taxpayer specific and are not available on the public domain. This prevents the operation of other transfer pricing provisions under the act. Hence, on the basis of the current provision, the taxpayers may have to comply with provisions like maintenance of transfer pricing filing and documentation of form 3CEB. The tax authorities would continue to move forward with the audit as per the provisions of the act even during the negotiations.
The nature of the Advance Pricing Agreements is to supply the taxpayers with confidence and support to their ethical resolution of pricing issues before the positions get established. Being a businessman, acquiring an APA can give you numerous profits like better assurance, ease the risk of financial reporting and so on. APA has shown results in reducing the double taxation and costs linked to the TP documentation preparations. If you’re a businessman, dealing with international transactions, then now is the time to switch to the Advance Pricing Agreement.