What is APA?
APA stands for "Advance Pricing Agreement".Advance Pricing Agreement (APA) saw the light of the day in the Finance Act 2012.
Advance Pricing Agreement or an APA benefits the tax payers who run businesses that involve international transactions, by providing them with tax certainty in the domain of transfer pricing.
This objective is achieved by specifying the methods of pricing and determining the Arm’s Length Price of international transactions in advance for a maximum period of five future years.
Further, the taxpayer has the option to rollback the APA for four preceding years, as a result of which, a total of nine years of tax certainty is provided.
The APAs are classified into two categories:
Bilateral Advance Pricing Agreement: When authorities of two countries hold negotiations in advance to determine the ALP of the future international transaction, it is referred as a Bilateral APA.Unilateral Advance Pricing Agreement: On the other hand, when taxpayers wish to have an agreement with only one Government of a country to have tax certainty in that particular country, then they may go for a Unilateral APA.
Nine UAPA's have been signed in July 2017 to solve issues of tax ambiguity by providing certainty in transfer pricing.
Types of international transactions where Advance Pricing Agreement is of benefit are:
- Sale or purchase of raw materials and/or finished goods.
- Software development services
- IT enabled services
- Engineering design services
- Distribution
- Contract manufacturing
- To extend financial assistance
- To transfer and use of tangible/intangible assets, etc.
Sectors of Economy that APA,s cater-to are:
- Oil & Gas exploration
- Education
- Banking
- Pharmaceutical
- Manufacturing
- Information Technology etc.
Things to be Noted
- It should be noted that the number of UAPAs signed in the current financial year is 18 and the number of BAPAs signed in the current financial year is 1. This brings the total number of APAs signed till date at 171 (Unilateral-159 and Bilateral-12). The CBDT do expects more APAs to be signed in the near future.
- The APA Scheme has received a warm welcome from the tax payers community and has successfully garnered accolades for The Indian Government for taking meaningful and long term fruit bearing measures when it comes to making the taxation system, business friendly.
