Advance Pricing Agreement [APA]

By : Neha Dhyani

Updated : May 16, 2022, 3:43

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.

Advance Pricing Agreement [APA] - Overview

An 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.

The pricing is determined based on some critical assumptions that are applied for a specified period of time based on certain terms and conditions.

Advance Pricing Agreement [APA] Types

Advance Pricing Agreements 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.

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Advance Pricing Agreement [APA] Significant Benefits

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.

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Who Can File For an Advance Pricing Agreement?

Any taxpayer undertaking or having already undertaken an international transaction can file for an Advance Pricing Agreement. In fact, 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 was aimed to operationalise the Advance Pricing Agreement programme. All stakeholders have praised the Indian APA scheme since it addresses complex pricing issues fairly and transparently.

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FAQs on Advance Pricing Agreement [APA]

Q1) How many Advance Pricing Agreements have been signed by the Central Board of Direct Taxes (CBDT) in 2021-22?

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 in the financial year 2021-22.

Q2) What is an Advance Pricing Agreement?

An 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.

Q3) How Many Advance Pricing Agreements Are There?

Advance Pricing Agreements can be multilateral, bilateral, or unilateral.

Q4) What is the benefit of an Advance Pricing Agreement?

Advance Pricing Agreement 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.