Advance agreements for transfer pricing continue to rise; 125 were signed in FY24

A record 125 Advance Pricing Agreements (APAs) were signed in FY24 despite the government’s lack of staff, which experts feel indicates the APA teams have grown more productive.

 

According to Sanjiv Malhotra, senior adviser at Shardul Amarchand Mangaldas & Co., “the government has multiple APA teams spread across the country and with every year, both taxpayers and APA teams are gaining more experience in relation to various international transactions.” “This efficiency and experience seem to be a major factor in the increasing number of signings each year,” he said. There were 95 APAs signed in total during FY23.

There are now four teams under CBDT that handle both unilateral and bilateral APA applications. They are situated in Bengaluru, Mumbai, and Delhi. The fifth team, which was just established in Gurugram, exclusively accepts BAPA applications.

In order to decide on the transfer pricing technique for pricing the taxpayer’s cross-border related party transactions in future years and to avoid any disputes that may arise from it, the taxpayer and tax administration sign APAs. They may stay in effect for up to five years at most.

APAs may be unilateral, involving the CBDT alone, or bilateral, involving the CBDT and the tax authorities of another nation. The majority of the signature increase in FY24 was associated with unilateral APAs (UAPAs). In FY24, there were 86 UAPAs signed overall, up from 63 in FY23; conversely, there were 39 bilateral APAs (BAPAs) signed overall, down from 32 in FY23.

The speed at which the taxpayer and Indian APA teams operate is the only factor that influences UAPAs. The CBDT enters an agreement with a domestic company (taxpayer) to conduct transfer pricing transactions with its offshore corporation without consulting its overseas counterpart. However, BAPA also necessitates communication and cooperation with a team of international competent authorities. Because the Indian side does not have complete control over the timeframe of BAPA closure, it usually takes longer.

According to Vijay Iyer, partner and transfer pricing leader at EY India, “the signed APAs typically pertain to cases filed in prior years as the APA process comprises several important steps generally spread over a year and beyond.”

Of the 95 APAs signed, 32 were bilateral APAs, according to the FY23 APA annual report. However, they remained a very small percentage of the total applications submitted throughout that fiscal year. According to the report, out of the 193 APA applications that were submitted in FY23, 192 were still in the processing stage, indicating that the signed applications had been filed in prior fiscal years.

But according to a source who spoke with FE, the government worked on a few APAs in FY24, taking “less than 12 months” from start to end.

According to Iyer of EY India, the CBDT regularly solicits feedback from interested parties on how to improve and accelerate the program in order to handle a greater number of cases each year. “These include expediting routine services application processing, expediting renewal cases, and streamlining the tax department’s APA approval procedure,” he said.

Citing official sources, FE has previously reported that the government’s attempt to expedite BAPA discussions is being hampered by a shortage of personnel and necessary knowledge to bring the process to a successful conclusion. This is true even though the Center established a fifth APA team with a Gurgaon headquarters expressly to expedite BAPA talks.

According to an official source, the main reason for the rise of BAPA signings (39 in FY24 compared to 32 in FY23) is that talks were completed for applications submitted in prior years rather than in FY24.

Every bilateral APA concludes with three steps. Prior to making suggestions for the price of the taxpayer’s transactions to the CBDT, a committed team reviews the applications for the agreement. The last phase is the signature of the agreement between the tax authorities and the corresponding domestic taxpayers. The second step is the CBDT negotiating the conditions of pacts with their counterparts.

Because there are several outstanding applications and only one-third of them are allowed to go to the second phase, the government is only having problems with the first step. Low manpower and a lack of experience are the major causes of this, the insider said.

To speed up the conclusion process, Karishma Phatarphekar, Partner, Deloitte India, advises the government to keep international tax concerns and transfer pricing (TP) considerations apart inside the APA process.

She said, “The APA team should not delve into broader tax implications that are not relevant for determination of arm’s length price, but rather should focus on determining arm’s length pricing.” “It is frequently observed that the APA team becomes biased in determining the arm’s length price due to other non-TP tax implications, resulting in significant delays in the production of position papers.”