Advance Pricing Agreements

What is APA ?

• Transfer Pricing : Transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control.
• APA : It is an agreement between a taxpayer and a tax authority that sets out how international transactions between related companies will be priced, to avoid any confusion or disagreement about the pricing of those transactions.
• APA helps determine the arm’s length price of international transactions in advance for a maximum of five future years (taxpayer also has the option to roll back the APA for four preceding years = Total of nine years of tax certainty).
• Guidelines for these agreements are included in Income Tax Act 1961.
• Types of APAs :
  • Unilateral
  • Bilateral
  • Multilateral

What is in the News ?

• The Central Board of Direct Taxes (CBDT) has entered into a record 95 Advance Pricing Agreements (APAs) in FY 2022-23 with Indian taxpayers. This includes 63 Unilateral APAs (UAPAs) and 32 Bilateral APAs (BAPAs). With this, the total number of APAs since inception of the APA programme has gone up to 516, comprising 420 UAPAs and 96 BAPAs.

Benefits

• The main objective of an APA is to keep a check on big multinational companies so that they do not engage in tax evasion by adjusting their profits based on their inter-corporate transactions (transfer pricing).
• Certainty in tax liability.
• Minimized audit tasks.
• Reduced cost of administration for tax authorities.

Central Board of Direct Taxes

• The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963.
• The officials of the Board in their ex-officio capacity also function as a Division of the Ministry dealing with matters relating to the levy and collection of direct taxes.

Practice Questions for Prelims

Consider the following statements regarding Advance Pricing Agreement :
1) These are negotiated by Central Board of Direct Taxes(CBDT).
2) It helps in reduction of Investor-State Disputes.

Which of the above statements os/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2

Ans. c)

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