Advance Pricing Agreement in India: Ensure Transfer Pricing Compliance for Multinationals

What is an Advance Pricing Agreement (APA)?

Advance Pricing Agreements (APA) is an agreement between the Tax Administration and the Taxpayer which determines in advance the Arm’s Length Price (ALP) or specifies the manner of determination of ALP (or both) in relation to an International Transaction. The primary goal of such programmes is to provide certainty to taxpayers in respect of the pricing of cross-border transactions undertaken by taxpayers with their group entities, making advance pricing agreement India a crucial tool for multinationals.

The APA Scheme endeavours to provide certainty to taxpayers in the domain of transfer pricing by specifying the methods of pricing and determining the ALP of International transactions in advance for a maximum of five future years. Further, the taxpayer has the option to roll-back the APA for four preceding years, as a result of which, tax certainty is provided for nine years.

The APA programme has contributed significantly to the Government of India’s mission of promoting ease of doing business, especially for Multinational Groups with a large number of cross-border transaction pricing India challenges.

Types of Advance Pricing Agreements in India

Unilateral Advance Pricing Agreement

This involves an agreement between the taxpayer and the Indian tax authorities. The taxpayer seeks assurance only from the Indian tax authorities regarding transfer pricing compliance for multinationals for specific transactions.

Bilateral/Multilateral Advance Pricing Agreement

This involves agreements between the taxpayer, the Indian tax authorities, and the tax authorities of other relevant jurisdictions. It provides comprehensive assurance across multiple tax jurisdictions, offering APA risk management and tax certainty for international businesses.

Advantages of Entering into an Advance Pricing Agreement

Certainty and Predictability

APAs provide certainty by establishing agreed transfer pricing methodologies, reducing the risk of audits, disputes, and potential double taxation. It also helps streamline compliance processes by pre-determining transfer pricing methods and terms, reducing administrative burdens for taxpayers.

Complex Cross-Border Transactions

For transactions involving complex arrangements, intangible assets, or intra-group services, APAs offer a structured approach to addressing transfer pricing challenges.

Industry-Specific Issues

Certain industries (e.g., technology, pharmaceuticals, financial services) with unique transfer pricing challenges may benefit from APAs tailored to their specific needs.

Multinational Operations

Multinational companies with significant cross-border transactions can use APAs to achieve consistent and compliant transfer pricing across multiple jurisdictions.

Tax Risk Management

APAs help manage tax risks by establishing clear transfer pricing policies and reducing exposure to potential tax adjustments.

Current Scenario of Advance Pricing Agreements in India

The number of advance pricing agreements India has witnessed a notable increase in recent years, reflecting the growing demand for certainty and transparency in transfer pricing arrangements.

This trend highlights the proactive approach adopted by taxpayers and tax authorities to address transfer pricing issues through mutual agreement and collaboration. The rise in APAs underscores the effectiveness of this mechanism in mitigating transfer pricing risks, reducing disputes, and promoting a cooperative relationship between taxpayers and tax authorities.

As per the data provided by the Central Board of Direct Taxes (CBDT), the CBDT has entered into a record 125 APAs in Financial Year (FY) 2023-24 with Indian taxpayers. This includes 86 Unilateral APAs (UAPAs) and 39 Bilateral APAs (BAPAs). This marks the highest ever APA signings in any financial year since the launch of the APA programme. The number of APAs signed in FY 2023-24 also represents a 31 percent increase compared to the 95 APAs signed during the preceding financial year (i.e. FY 2022-23).

 With this, the total number of APAs since inception of the APA programme has gone up to 641, comprising 506 UAPAs and 135 BAPAs. During FY 2023-24 CBDT also signed the maximum number of BAPAs in any financial year till date. The BAPAs were signed as a consequence of entering into Mutual Agreements with India’s treaty partners namely Australia, Canada, Denmark, Japan, Singapore, the UK and the US.

The trend of filing advance pricing agreement India in India has been on the rise, reflecting a growing emphasis on transfer pricing compliance for multinationals and risk management among taxpayers.

[1] As defined in section 92B of the Income Tax Act, 1961