In today’s increasingly regulated corporate environment, transparency is critical for taxpayers to effectively manage tax risks and compliance. One of the most reliable tools to achieve this certainty is an advance pricing agreement, which provides clarity on transfer pricing arrangements. There is an assurance for the taxpayer through advance pricing agreements due to the benefit of having acceptable pricing methods defined. They may either be unilateral, bilateral or multilateral, based on the number of tax jurisdictions that have been involved.
An advance pricing agreement is essentially a contract, typically spanning several years, between a taxpayer and more tax authorities that determines the pricing approach for transactions with associated enterprises. These agreements are designed to proactively resolve transfer pricing issues—past, present or future—in a cooperative and non-adversarial manner, offering an alternative to traditional audits and disputes.
Businesses benefit significantly from entering into an APA, as it enhances certainty in transfer pricing policies, reduces the likelihood of disputes, and supports accurate financial reporting of tax liabilities. Most importantly, it minimizes the risk of double taxation and lowers the costs associated with audit defense and extensive documentation. APA terms are flexible, with no fixed minimum duration, and can extend up to five years depending on the agreement.
Who is eligible to apply for Advance Pricing Agreements?
Any tax payer who has undertaken an international transaction or is contemplating to undertake an international transaction is eligible to file an APA and there is no monetary limits or prescribed criteria for a tax payer to be eligible for applying for an APA. Further, the Indian APA regulations do not specify any financial or other requirements in order for a taxpayer to be qualified to apply. However, domestically controlled transactions are not eligible for the APA mechanism.
The APA filing costs are set at relatively high amounts in accordance with Indian APA standards. Additionally, it states that "determining the suitability of international transactions for the agreement" is one of the pre-filing consultation's goals. Consequently, it seems that although though eligibility is not specifically limited, the government may be hoping that taxpayers will use the program for intricate and expensive transactions.
Moreover, an APA may apply to any kind of cross-border transaction, including those involving the transfer of both tangible and intangible assets, cost sharing, the giving and receiving of services, the supply of goods, etc.
For foreign transactions involving permanent establishments, APAs are also feasible. Furthermore, the Indian regulations permit the taxpayer to selectively apply for an APA solely for specific international transactions, in line with APA programs in other nations. In these situations, the taxpayer must inform the APA team about all additional foreign transactions. It is also important to remember that proposed transactions as well as ongoing transactions may be subject to an APA.
Compliance of Advance Pricing Agreements
In accordance with international standards, the compilation process consists of four phases:
Phase I - Pre-filing phase:
A pre-filing consultation meeting would be the first step in the APA procedure. The purpose of this meeting is to ascertain the agreement's scope, comprehend the transfer pricing concerns raised, and assess if the overseas transaction is appropriate given the agreement. In this phase, there is no price to be paid.
Phase II - Formal submission phase:
If the taxpayer wishes to apply for an APA following the pre-filing meeting, they must submit an application in the required format with the necessary information. At this point, the APA filing fee must be paid. Critical assumptions must be specified by the taxpayer in the application. A set of taxpayer-related facts and macroeconomic factors (such as business, industry, and economic situations) are referred to as critical assumptions if their continuous existence is important to bolster the conclusion reached under an APA. Any significant deviation from any of the fundamental presumptions could lead to an amendment of the APA or, in severe cases, termination.
Phase III - Phase of Negotiation:
Upon acceptance of the application, the APA team will meet with the applicant and do any required case-related research. Following the conversation and investigation, the APA team will create a report that will be sent to the Director General of Income Tax (International Tax and Transfer Pricing) for unilateral APA, or the Competent Authority in India for multilateral APA.
Phase IV - Phase of Finalization:
During this stage, feedback on the draft APA is shared, the APA is finalized, and the first years covered by the APA term that have already passed are given effect.
Withdrawal of APA application:
The applicant may withdraw their APA application at any point up to the agreement's finalization (i.e., signature by CBDT). Nevertheless, application filing fees are not refundable.
Validity of APA [section 92CC(4)]:
The agreed-upon period may be used for the APA. It cannot, however, surpass five years in a row.
Effect of APA Binding [section 92CC(5)]:
APA is binding on the person whose case it has been entered (i.e., signed by CBDT) and income tax authorities on the international transaction that person has undertaken. Nevertheless, the APA won't be legally binding if
- A factual or legal change has an impact on the agreement.
- If the board determines that this is the case, the individual obtained the APA by deceit or deception.
Annual compliance report and Compliance audit [Rule 10-O and 10-P]
- Annual Compliance Report: For each year covered by the agreement, the assesse must provide the Director General of Income Tax (International Taxation) with an annual compliance report (in form 3CEF) no later than 30 days following the deadline for filing income tax returns or, if later, 90 days following the agreement's entry.
- Agreement Compliance Audit: The transfer pricing officer is required to conduct an annual compliance audit of the agreement (as defined by the agreement) based on the compliance audit report that the assesse submits. The compliance audit report must be filed no later than six months from the end of the month in which the assesse submits their annual compliance report.
Revision and Cancellation of APA
Revision of agreement [Rule 10-Q]:
In the following situations, the board may amend the APA Agreement (either so moto or upon request from the assesse, DGIT, or other appropriate authority):
- Modification of fundamental presumptions or noncompliance with an agreement's requirement.
- A change in the law that affects any of the matters mentioned makes the agreement void.
- Request from a different nation's responsible authority (in the event of a bilateral or multilateral agreement).
Agreement cancellation: The board may terminate an agreement in the following situations:
- Assesses noncompliance with the terms of the agreement (as determined by the compliance audit report).
- a. An annual compliance report from the assesse has not been provided.
- c. There are significant mistakes in the annual compliance report that the assesse provided.
- b. The assesse disagrees with the suggested revision.
Provisions for Rollback (Section 92CC(9A))
Income tax law offers provisions for rollback mechanisms under the APA scheme with the aim of reducing the number of pending litigations. Applying APA terms and conditions from years before the year of application is known as rollback provisions.
By submitting form 3CEDA with the application for APA, the Income Tax Act permits the application of APA terms from four years prior to the year of application. An applicant must choose to use all four prior years (prior to the first year for which APA applies) if the company requests rollback provisions.
Conditions for applying for Roll back provisions
- The income tax return for the rollback year was submitted prior to the deadline indicated in section 139(1), meaning the return was not submitted after the deadline.
- 2. An audit report pertaining to foreign transactions has been provided under section 92E.
Non Applicability of Roll back provisions
Rollback clauses cannot be used if the Appellate Tribunal is hearing an appeal over the ALP determination for a certain rollback year and an order was made prior to the agreement's signature. Furthermore, a request for a rollback provision should not result in a fall in income or an increase in loss as reported in the relevant year's income return.
Effect to APA [section 92CD]
- If the taxpayer provided the income tax return (for any assessment year to which the APA applies) prior to the agreement's date of entry, he must provide a revised return within three months of the agreement's conclusion in order to comply with the APA.
- After one year from the end of the financial year in which the updated return is provided, AO will pass an order changing total income in accordance with APA if the assessment for the period covered by APA is finished.
- If the assessment for the time period covered by the APA is still pending with AO, AO must proceed with the assessment while taking the assessor’s updated return into account. In this instance, the statute of limitations for finishing the assessment will be extended by a full year.
Note: The conditions listed in Sections 92CC (6) and 92CC (7) specify when the APA will not be enforceable or when it may be deemed void-ab-into. There are situations listed in Rules 10Q and 10R where the APA may be changed or revoked.
Consequence of non-compilation of APA
Noncompliance of the terms of the APA, including the critical assumptions, may lead to the cancellation of the APA and when there is no APA compliance there shall be regular audit carried out in respect of any international transaction.
How SKMC can help?
One of the main services provided by SKMC Global and the dispute resolution network is assistance with APA requests. We have a great deal of expertise assisting businesses in a wide range of industries to get APAs for a variety of inter-company transactions.
In order to help you achieve effective results, we can collaborate with you to create plans at the local and international levels and assist you with the APA request process.
Followings are the listed offerings from our end
- To help and assist with the assessment and development of the advance pricing agreement strategy;
- To help with the application process and submission to the tax authority for advance pricing agreements;
- Assistance with representation in negotiations and other matters pertaining to advance pricing agreements before the tax authorities;
- Support for compliances following the signing of the contract with the CBDT