Advance Pricing Agreement – APA meaning, Procedure, fees, and benefits
By BYJU'S Exam Prep
Updated on: November 14th, 2023
Advance Pricing Agreement or APA is an agreement or deal between two entities – the tax authority (CBDT in India) and the taxpayer, regarding the transfer pricing methodology to price the taxpayer’s future years’ international transactions. As per the Advance Pricing Agreement, such transactions are called “Covered Transactions.”
The pricing is determined based on some critical assumptions applied for a specified period based on certain terms and conditions. In this article, you will learn the Advance Pricing Agreement (APA) in detail.
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What is Advance Pricing Agreement (APA)?
The APA is based on the agreed transfer pricing methodology responsible for deciding the prices for taxpayers’ future international transactions. The Advance Pricing Agreement provides transparency to the taxpayers about the risks of tax along with providing the possible exposure of such risks. Thus, creating a fair atmosphere for business.
Download Advance Pricing Agreement (APA) PDF
On 31st March 2022, the Central Board of Direct Taxes (CBDT), Government of India, announced that it had signed 62 Advance Pricing Agreements (APAs), including 13 Bilateral and 49 Unilateral APAs, with Indian taxpayers in the financial year 2021-22.
The figure was 31 APAs in 2020-21 and 57 APAs in 2019-20. This has taken the total APAs since its inception to 421.
Types of Advance Pricing Agreement
Advance Pricing Agreement can be multilateral, bilateral, or unilateral. The following explains each APA in detail:
- Unilateral APA – In a unilateral APA, the two parties are the taxpayer and the tax authority, both in the same country.
- Bilateral APA – Bilateral APA refers to the APA between a foreign tax authority, the tax authority of the taxpayer’s country, and the taxpayer’s Associated Enterprise (AE) in a foreign country.
- Multilateral APA – Multilateral APA refers to the APA between more than two Associated Enterprises of the taxpayer in various foreign countries, the tax authorities of the Associated Enterprises, and the tax authority of the taxpayer’s country of residence.
Procedure for Application of APA- Rule 10
The procedure for the application of the Advance Pricing Agreement is a follows-
- The applicant can furnish an application in the form of 3CED to the Director General of the International taxation authority for a unilateral agreement. In case of the bilateral or multilateral agreements, the applicant can be sent to the Competent Authority of India.
- In case of non-recurring transaction, the timing for filling the application for the APA is before the international transaction is undertaken while if it is a recurring transaction, then it should be applied before the first day of the previous year.
- As there is a huge fee for APA, there is an option to make a request for discussing the Agreement;s board terms and conditions, identifying TP issues, determining the scope of the agreement and determining the suitability.
- As per Section 92CC, the board shall obtain approval from the Central Government.
Advance Pricing Agreement Fees
The fees for the advance Pricing agreement are mentioned in the following table-
|
Value for which APA is proposed |
Fees Amount |
|
More than INR 200 Crores |
INR 20 Lakhs |
|
More than INR 100 Crores but upto INR 200 Crores |
INR 15 Lakhs |
|
Less than INR 100 Crores |
INR 10 Lakhs |
Significant Benefits of APA
An Advance Pricing Agreement is beneficial for several reasons. The most prominent benefits of APA are as follows:
- APA provides certainty to a taxpayer’s international transactions’ since the agreement mentions in advance the pricing methodology, also known as arm’s length pricing, of the taxpayer’s international transactions.
- Eliminates the threat and rigours of an audit by aligning the tax outcome with the terms of the APA agreement.
- Excellent savings by way of lower compliance costs over the APA term.
- It gives the tax authorities higher liberty to reduce the expenses of administration.
- Enhances the ease of doing business by fostering a non-adversarial and competitive tax regime.
Hence, Advance Pricing Agreement provides a win-win situation for both the taxpayer as well as the tax authorities.
Who Can File For an Advance Pricing Agreement in India?
Any taxpayer undertaking or having already undertaken an international transaction can file for an Advance Pricing Agreement. APA covers all international transactions. Advance Pricing Agreement heralds a new era for taxation in India. The Indian government rolled out the APA in 2012, vide the Finance Act, 2012, through the insertion of Sections 92CC and 92CD in the Income-tax Act, 1961, to shake off India’s image as a country following an aggressive transfer pricing regime.
The APA scheme was inserted into the Income Tax Rules vide notification no. 36/2012 [F. No. 133/5/2012-SO(TPL)]/SO 2005 (E), dated 30th August 2012. It aimed to operationalize the Advance Pricing Agreement program. All stakeholders have praised the Indian APA scheme since it addresses complex pricing issues fairly and transparently.
