The finance ministry has set in motion the fifth Advance Pricing Agreement (APA) team in Gurugram to put these bilateral pacts aimed at reducing transfer pricing disputes on the fast track, sources aware of the matter told FE.
The team has been specifically constituted to “wind up” the pending bilateral APAs (BAPAs), as negotiations involved in the process take more time to get concluded.
As of now, the Central Board of Direct Taxes (CBDT) is negotiating the agreements with their counterparts in US, UK, South Korea, Japan and Finland, sources said.
The other four teams are based in Delhi, Mumbai and Bengaluru, and all of these take up both bilateral and unilateral APA applications. 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.
Launched in 2012, the programme provides the CBDT to sign an APA with a taxpayer, effective for a maximum period of five years. The taxpayer also has the option to roll back the APA for four preceding years, as thus, tax certainty is provided for nine years.
Under the programme, APAs can be bilateral, involving CBDT and the tax authorities of another country, or unilateral, which involves the CBDT only. In unilateral APA (UAPA), 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 (BAPA), 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.
“Bilateral APAs need fast-tracking since there are many more steps in BAPAs as compared to unilateral APAs, and hence it needs a mechanism for faster movement of files so that the entire time taken for the completion of the APA is not extended beyond what a typical unilateral APA would take,” said Vijay Iyer,Transfer Pricing Leader, EY India.
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.
A total of 193 APA applications were filed in FY23 – of which 116 were unilateral APAs, and 77 were bilateral. In fact, of the 193 applications filed, 192 are under process, meaning the signed ones were filed in the previous financial years.
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 BAPA applications is significantly higher at 69% as against 43% for UAPA.
“The time taken by a BAPA to conclude averages around 5 years while the validity of the APA itself is for five years,” said Kumarmangalam Vijay, partner, JSA advocates & solicitors, while adding that the fifth APA centre for fast tracking BAPA is a welcome step.
Jalaj Gupta, Leader – Transfer Pricing & Tax at SW India, said: “Reducing the average time in an APA conclusion is the need of the hour especially when compared with other developed parts of the world along with the stability of tenure of the officer as frequent transfers or shifting makes the process ineffective.”