The income tax department has received more than 500 applications from non-resident companies for advance pricing agreements (APAs). According to analysts, the rising APA applications signal the readiness of businesses to use this window for audit exemption rather than risk rigorous transfer pricing audits, despite the recent trend of softening tax claims.
These agreements would guide the department’s pricing of non-resident companies’ transactions with local associates and enable them to get exemptions from audit of these transactions for the next five years.
The transfer pricing audits are aimed at preventing preferential pricing of transactions within group companies with the idea of getting profits taxed in the lowest tax country. Transfer pricing adjustments or the tax department’s claims of profit shifting by companies, which had touched R70,000 crore in the 2012-13 audit, had fallen to R47,000 crore in the latest 2014-15 audit.
Experts said that the huge tax claim from the 2012-13 audit partly arose from officials questioning share valuation of certain transactions, which has not been repeated subsequently.
Past disputes arising from income adjustments of about Rs 2.6 lakh crore that the department has so far sought to make are still in litigation.
“In mature economies, businesses go for APAs to resolve complex tax matters. In India, however, many APA applications are filed, especially by IT and ITeS companies, because another option to reduce disputes — the safe harbour scheme — has not taken off the way it was expected. If this scheme is made more investor-friendly, one would eventually see the trend of APA applications being filed only on complex matters,” said SP Singh, senior director at Deloitte in India.
The reduction in claims of income suppression in recent years is also a result of efforts to identify transactions that actually run the risk of revenue leakage rather than routinely auditing every transaction above Rs 15 crore. It has also asked field officers to give a patient hearing to businesses before making any income adjustment.
Sources in the government said the tax department, which has already signed six APAs with companies, have set an internal deadline of roughly two years to translate every application into APAs. The finance ministry recently allowed rolling back of the APAs signed for four previous years too.