Union Government has received Rs. 3,000 crore of additional tax from MNCs that have entered into advance pricing agreements (APAs) with it over last five years and also has eliminatedbig source of tax litigation. It was revealed in recently released annual report on advance pricing agreements (APAs) for FY18 by Central Board of Direct Taxes (CBDT).
Key Highlights of report
219 APAs signed by CBDT has resulted in MNCs accepting extra income of Rs 10,000 crore, translating into tax of Rs 3,000 crore. Between FY06 and FY15, around Rs. 2.6 lakh crore were added by taxman to income of MNCs through what are called ‘transfer pricing adjustments’, and many of these have been settled by using APAs.
The rate of completing APAs pacts has slowed down in FY18 compared to year ago. CBDT had signed 88 APAs in FY17 and it has now come down to 67 in FY18. One of the reasons for dip was increasing complexity of cases, which required more time for analysing relevant international transactions.
Shortage of manpower at level of additional or joint commissioners and deputy or assistant commissioners in APA teams also has slowed down processing of applications. At the end of FY 17, there were 684 APA applications under process compared with 985 filed since launch of programme.
Despite slowing, India has outperformed China in finalising APAs in last five years. Compared to its 219 APAs since FY14, China managed to sign only 139 APAs in 12 years between 2005 and 2016. Of 58 unilateral APAs entered into in FY 17, 40 have associate enterprise of Indian applicant based in US, followed by UK with 22 applications.
Advance Pricing Agreement
APAs are primarily aimed at avoiding transfer pricing disputes arising from cross-border transactions undertaken by MNCs. Through these agreements, tax department and companies seek to resolve transfer pricing disputes in advance before the cross-border related party transaction actually takes place. Its provision was introduced in Income-tax Act, 1961 in 2012 and Rollback provisions to it were introduced in 2014.
APAs provide certainty to taxpayers in domain of transfer pricing by specifying methods of pricing and setting prices of international transactions in advance. It gives certainty to MNCs that agree on certain principles in valuation of their cross-border transactions. It also provides them with alternate dispute resolution mechanism with respect to transfer pricing. It helps in determining arm’s length price of international transactions in advance for max period of 5 future years. It also strengthens Government’s resolve of fostering non-adversarial tax regime. It also has significantly contributed towards improving ease of doing business in India and has been appreciated nationally and internationally for being able to address complex transfer pricing issues in a fair and transparent manner.