With as many as 1,000 applications from multinational corporations seeking an element of tax certainty in India remaining unresolved, capital inflows into the real economy from abroad may take a hit. These applications filed under the Advance Pricing Agreements (APAs) mechanism are for pre-determination of arm’s length prices for certain periods in MNCs’ transactions with related parties abroad. The APAs, introduced in 2012 and bolstered in 2014, had initially been effective in reducing tax disputes arising out of transfer pricing adjustments by the taxman. But there has been a decline in its efficacy as the agreements got delayed in recent years particularly after the pandemic, analysts said. They added that at a time when fresh investments by the private sector are key to economic revival given the government’s acute fiscal constraints, the delays in finalising APAs could prove to be costlier. In the past 10 years, about 1,500 APA applications have been filed by multinational businesses in India but only about 420 have been concluded, leading to around 1,000 unresolved applications.
APAs were introduced through Finance Act, 2012, in the wake of allegedly hawkish transfer pricing adjustments sought by the taxman, which used to expose the businesses to the risk of huge outflows in the form of taxes, interests and penalties.
Aggressive transfer pricing adjustments had led to a rise in litigation and vitiated the tax regime for MNCs operating in India. Before the launch of APAs, India accounted for two-thirds of global transfer pricing disputes by volume.
Given that on an average of only 60 APAs are concluded in recent years as against the fresh filing of 150 applications per annum, many cases are stuck for 4-5 years, making the process irrelevant for businesses as they lose precious time. The APAs typically cover nine years — five years prospectively and four years backwards.
Analysts are worried over the “low priority” accorded to APAs by the government, even though it was clear the arrangement could yield rich dividends by way of enhanced foreign investment and tax revenues. These delays, they say, can be addressed by tripling the APA officers’ strength from 16 now to about 50.
An email sent to CBDT on the reasons for the delays in resolving APA applications did not elicit any response.
“The APA teams and the APA unit in the CBDT are both overburdened with work. This has resulted in slow disposals of APA applications,” said Sobhan Kar, former Indian Revenue Service officer and senior adviser (transfer pricing), Deloitte India.
The unresolved APA applications are largely from global captive centres, FMCG and industrial and financial sector firms which require inter-company transactions on a regular basis. The taxpayers and the government have both benefited from APAs as many potential transfer pricing disputes have been prevented and assured tax payments have flowed into the government’s kitty.
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“Every business wants to go up in the value chain, by doing more R&D work, innovation and technology with local engineering talent available here, the inordinate delays in concluding APAs create uncertainties and can become a factor in preventing the multinationals from ramping up operations in India,” Sudhir Kapadia, tax partner at EY India, said.In the absence of timely disposal of APA applications, the taxpayers have to face tax demands and struggle with litigation, Kar said. “This goes against the government’s proclamation of ease of doing business and non-adversarial tax regime. India needs to provide tax certainty within a reasonable period to attract higher foreign investments, which would provide a much-needed boost to our GDP and employment creation,” Kar added.Besides running the unilateral leg of the APA programme, the CBDT has also engaged with its various tax treaty partners to negotiate and enter into bilateral APAs, which provide the taxpayers with an added benefit of relief from any double taxation. According to industry sources, the US revenue authorities are keen to hold talks with their Indian counterparts as early as next month to conclude some bilateral APAs.
According to Kapadia, India must conclude more APAs, especially the bilateral ones, on a priority basis. “Every white collar job creates at least three more ancillary jobs. APAs are not about giving any benefit, they are about just giving tax certainty,” Kapadia added.
Under APAs introduced via Finance Act, 2012, the tax authorities enter into an agreement with a taxpayer for predetermination of arm’s length price for five years. In 2014, the Central Board of Direct Taxes (CBDT) allowed taxpayers to apply for the benefit of negotiations under an APA for four years preceding the term of APA. The CBDT also gave taxpayers the option to choose a unilateral, bilateral (negotiated with another country’s competent authority), or multilateral APA (negotiated with multiple competent authorities). APAs signed by India cover royalties, intra-group services, guarantee fees, economic adjustments etc.