- CBDT enters into 26 APAs during April to August
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CBDT enters into 26 APAs during April to August
Central Board of Direct Taxes (CBDT) has entered into 26 Advance Pricing Agreements (APAs) in the first 5 months of the current financial year (April to August, 2019).
ABOUT THE CBDT’S 26 APAS
- With the signing of these APAs, the total number of APAs entered into by the CBDT as of now stand at 297, which includes 32 Bilateral Advance Pricing Agreements (BAPAs).
- Out of the 26 APAs, 1 is a BAPA entered into with the United Kingdom and the remaining 25 are Unilateral Advance Pricing Agreements (UAPAs).
- The BAPAs and UAPAs pertain to various sectors like Information Technology, Banking, Semiconductor, Power, Pharmaceutical, Hydrocarbon, etc.
WHAT IS ADVANCE PRICING AGREEMENT (APA)?
- Advance pricing can be understood as an agreement between a taxpayer and a tax authority fixing the transfer pricing methodology to decide the pricing of future international transactions of the taxpayer.
- Transfer price is the charges at which one company makes available goods or finance or services to another company that is related to it.
- APA was introduced in India in 2012 through Finance Act, 2012.
- For example, suppose that Maruti Suzuki India has higher profit and has to pay higher tax to the Government of India. In this case, if Suzuki Japan (parent company of Maruti Suzuki) charges a high price for a component it sold to Maruti, profit of Maruti will come down and the tax payment of the company to GoI will also come down.
- On the other hand, the revenue of Suzuki Japan will go up. Altogether, the Suzuki Motor Coroporation (SMC) who owns India’s Maruti improves is position; but GoI’s tax revenue affected.
PURPOSE OF ADVANCE PRICING AGREEMENT
- The main purpose of transfer pricing and APA is to keep a check on big MNCs so that they do not indulge in tax evasion.
- Such big companies have subsidiaries and associate companies in several countries and they tend to adjust their profits based on their inter-corporate transactions.
- These MNCs are known to divert profits out of India by applying various methods that reduce their tax liability in the country.
- For example, an MNC in India can show higher than actual costs of goods and services purchased from their subsidiaries thereby showing higher expenditure and getting relaxation in tax.
TYPES OF ADVANCE PRICING AGREEMENT (APA)
- As the name itself signifies, Unilateral Advance Pricing Agreement involves only the taxpayer company and just the tax authority of the country where the company is located.
- Bilateral APA actually involves four entities in total. First is the taxpayer located in the country. Second is the tax authority of the taxpayer’s location. The third entity is the associated enterprise (AE) of the taxpayer in a foreign country and fourth if the tax authority of the country where the associated enterprise is located.
- A multilateral APA involves multiple entities which get into an agreement about transfer pricing.
- These entities include the taxpayer in a country, the tax authority of the taxpayer’s company, two or more associated enterprises of the taxpayer and the respective tax authorities of the countries where these AEs are located.
BENEFITS OF ADVANCE PRICING AGREEMENT (APA)
- The very first benefit of APA is to check evasion of taxes. APAs offer certainty in terms of the tax liability of taxpayer’s foreign transactions by the application of ‘Arm’s Length’ Pricing technique to decide upon the prices of international transactions.
- APA minimizes the time and effort that goes into audit tasks. This removes the threat of audit for an enterprise taxpayer who has business across several countries.
- As for tax authorities in various countries, the application of APAs removes extra pressure on their resources and reduces the cost of administration as well.