Multinational companies that sign Advance Pricing Agreements (APAs) with India for tax certainty will not be eligible for the 3% tolerance range permitted in the law for the value of cross-border transactions between MNCs and their Indian associates to be considered on an arm’s length basis.
The Revenue Department, however, would be generous while deciding the arm’s length price of the proposed cross-border transactions under APAs, compared to the minimum profit margins specified in another scheme meant to avoid tax litigation ? the Safe Harbour scheme.
Also, MNC arms in India have to undergo only token annual audit requirements regarding compliance of the price of cross-border transactions agreed in an APA.
The Central Board of Direct Taxes (CBDT) has told field officials that the tolerance range for international transactions, although provided for in Section 92C of the Income Tax Act, would not be applicable where the arm’s length price has been established through negotiations, as in an APA.
All international transactions above Rs 15 crore between Indian entities and their associates abroad have to be such that they are done between independent unrelated parties subject to market forces. The idea is to check any shifting of taxable profits out of the country. The government accepts transaction values reported by companies even if they vary from tax officials’ assessment by up to 3%.
Sources said the APA itself includes several critical assumptions, which if proved to be wrong, renegotiation of the APAs could be considered. These circumstances include sharp changes in the fortunes of the economy and unanticipated losses to the business due to natural disasters. Therefore, there is no need to grant a 3% tolerance margin on top of a negotiated arm’s length price, said an official familiar with the development.
Besides, while negotiating APAs, tax officials will not refer to the minimum profit margins stipulated in the Safe Harbour scheme ? considered by many as above industry standards– as a barometer for the operating profits MNCS have to declare in India under APAs.
Officials privy to the board’s thinking said the Safe Harbour scheme is mainly for certain types of businesses classified together such as IT and ITES, whereas terms of each APA are negotiated individually with companies depending on the facts of the case.
MNCs signing up for APAs would also get an extremely benign audit regime. Audit of an APA partner company is meant only to check whether the company has complied with the agreed arm’s length price every year or not. The scope of the audit would not be as broad as in any other international transaction. Besides, transfer pricing officers have have no liberty to make adjustments in the income of companies party to an APA. In case any deviation from the agreed price is noticed, the officer can only make a report to the CBDT, which would then take a call on whether a broader audit is warranted or not.
India has signed five unilateral APAs with multinational companies in pharmaceutical, telecom, exploration and financial services aimed at giving certainty in taxation to businesses.