The government’s plan to fast-track bilateral Advance Pricing Agreement (APAs) negotiations is being thwarted by the lack the requisite expertise and manpower to conclude the process, sources aware of the matter told FE.
In FY23, the Central Board of Direct Taxes (CBDT) signed 32 BAPAs, and this year, the number is unlikely to be any higher, the sources said.
Currently, the CBDT is negotiating the agreements with its counterparts in the US, the UK, South Korea, Japan and Finland, but the process is moving at a snail’s pace.
Launched in 2012, APAs are pacts signed by two parties – taxpayer and tax administration – in order to determine the transfer pricing methodology for pricing the taxpayer’s cross-border related party transactions for future years, and to prevent any dispute arising from it. They are effective for a maximum period of five years.
APAs can be bilateral, involving CBDT and the tax authorities of another country, or unilateral, which involves the CBDT only. In unilateral APA, the CBDT – without engaging with its foreign counterpart – signs the pact with a domestic firm (taxpayer) undertaking transfer pricing transactions with its offshore entity.
The bilateral APA, on other hand, requires tax authorities of both countries to negotiate and discuss the terms of the pact first, and post agreement, sign it with their respective domestic taxpayers. Since the bilateral APA involves authorities of two countries, it’s a longer process as against the unilateral.
Presently there are four teams under CBDT – based in Delhi, Mumbai, and Bengaluru, who take up both bilateral and unilateral APA applications. The fifth team, set up recently in Gurugram, takes up only BAPA applications.
“Normally an APA should be concluded at least two years prior to the APA term getting over. The problem today is significant because APAs are concluding in fact post the APA term getting over and one of the reasons for this could be lack of fully operational dedicated bilateral APA teams and frequent transfers within the APA team,” said Karishma Phatarphekar, partner, Deloitte India.
There are three stages in conclusion of any bilateral APA. First, a dedicated team examines the applications for the agreement and makes recommendations regarding the methodology for pricing the taxpayer’s transactions to the CBDT. The second step involves the CBDT negotiating the terms of pacts with their counterparts, and the last step is signing of the pact between the tax authorities and their respective domestic taxpayers.
“The government is facing issues with the first step only as there are several pending applications, and only a-third among them are able to move to the second step. This is mainly due to low manpower,” the sources said.
According to the 2022-23 APA annual report, the CBDT signed a record 95 APAs in FY23 as against 62 in FY22. Of the 95, the bilateral APAs signed were 32. But this is still significantly lesser than the number of applications filed in the previous fiscal year.
Since the launch of the programme – 1,659 APA applications have been filed, and about 50% of them are still pending to be signed by the CBDT. The pendency of bilateral APA applications is significantly higher at 69% as against 43% for unilateral ones.
However, Vijay Iyer, partner and transfer pricing leader, EY India, says that while bilateral APAs have taken more time to get resolved owing to CoVID, travel constraints and logistical challenges coupled with bandwidth constraints, a lot of these challenges have been resolved and we would see quicker resolutions in the future. “The authorities have developed a framework to resolve APA cases and that would help in resolving cases without having to reinvent the wheel for every case,” he said.
Recently CBDT had bilateral APA negotiations with the tax authorities of USA and Singapore and the meetings were extremely successful. The authorities managed to resolve a few cases and agreed on a process to resolve many more cases in the future, the sources said.