Central Board of Direct Taxes signed 4 Unilateral Advance Pricing Agreements

The Central Board of Direct Taxes (CBDT) on 6 February 2017 signed four Unilateral Advance Pricing Agreements (UAPAs) as part of the Advance Pricing Agreement Scheme.

The four UAPAs signed pertain to the manufacturing, financial and information technology sectors of the economy.

The international transactions covered in these agreements include contract manufacturing, information technology enabled services and software development services.

With the signing of these four APAs, the total number of APAs entered into by the CBDT has reached 130. This includes 8 bilateral APAs and 122 Unilateral APAs.

What is Transfer Pricing & Need for Advance Pricing Agreement?

• Transfer pricing is the setting of the price for goods and services sold between related legal entities within an enterprise.

• For example, if a parent company purchases goods from its subsidiary, the price of those goods paid by the parent to the subsidiary is known as the transfer price.

• Over the years, it has been observed that the transfer pricing mechanism is prone to misuse by the multi-national companies (MNCs).

• Some MNCs use the ‘transfer price’ method to transfer profits from a high-tax territory to a tax haven.

• It is in this context the mechanism of advance pricing agreement (APA) comes into the picture.

• An APA is an agreement between a taxpayer and the tax authority determining the transfer pricing methodology for pricing the tax payer’s international transactions for future years.

• An APA provides certainty with respect to the tax outcome of the tax payer’s international transactions.

• An APA can be one of the three types - unilateral, bilateral and multilateral.

• A Unilateral APA is an APA that involves only the taxpayer and the tax authority of the country where the taxpayer is located.

• Bilateral APA (BAPA) is an APA that involves the tax payer, associated enterprise (AE) of the taxpayer in the foreign country, tax authority of the country where the taxpayer is located and the foreign tax authority.

• Multilateral APA (MAPA) is an APA that involves the taxpayer, two or more AEs of the tax payer in different foreign countries, tax authority of the country where the taxpayer is located and the tax authorities of AEs.

• The progress of the APA Scheme is an indication of  the government’s resolve of fostering a non-adversarial tax environment.

• The Indian APA program has been appreciated in India and across the world for being able to address complex transfer pricing issues in a fair and transparent manner.