Applications for agreements aimed at preventing tax disputes between multinationals and Indian authorities have piled up due to the Covid-19 disruptions at the tax office.
Around 700 are pending, but despite high hurdles, the Central Board of Direct Taxes (CBDT) expects to approve a record number of these agreements, called Advance Pricing Agreements (APAs), in 2022-23. A total of 62 APAs were signed in 2021-22 and 31 were ratified in 2020-21. Of the 62 APAs in FY22, around 30 were signed in March alone.
A government official said the site visit could not take place due to the COVID-19 restrictions, due to which the cases increased. “The APA cases have piled up and there may be around 700 odd cases. We lost almost six months last year due to the Covid-19 restrictions. However, the process has gained momentum. We could see a record number of APAs being signed this year. The final high was 88 cases in 2016-17,” the official said.
The APA seeks to provide certainty to MNCs with respect to the transfer value of cross-border transactions carried out by these companies with their group entities. Agreements between the taxpayer and the tax authority on pricing transactions between related parties are concluded in advance.
In simple words, the transfer value of goods and services transacted between group entities is agreed upon in advance by the tax authorities and taxpayers to prevent any disputes later. APAs provide certainty to a company operating in India for a maximum period of nine years (potentially five years and four roll-back years).
Vijay Iyer, Partner and National Leader, Transfer Pricing, EY India, said, “APA picked up pace in March and then it slowed down again. We hope they rise again soon. At that pace, with 62 APAs last year, it would take about 10 years to clear the backlog, which does not bode well for tax certainty.”
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He said some structural changes are needed, including increased manpower. At present, there are four commissioners and four joint commissioners. “We need more joint commissioners. A pyramid structure is needed for faster withdrawals,” Iyer said. According to him, APAs give investors confidence to expand operations in view of the non-adversarial tax regime.
Akhilesh Ranjan, Tax Policy Adviser, PwC India said that APAs are the cornerstone of tax policy built around predictability and certainty. “Given the huge list of pending APA applications, I feel the time has come for CBDT to augment the APA workforce,” he said.
The 62 agreements in 2021-22 include 13 bilateral APAs and 49 unilateral APAs. With this, the total number of APAs since the inception of the APA program has gone up to 421. This scheme was implemented in August 2012.
Niru Ahuja, Partner, Deloitte India, said, “The biggest advantage of such agreements is that businesses get certainty from a transfer pricing perspective and do not have to face detailed audits on the same transaction year after year. ” Queries emailed to CBDT remained unanswered till press time.
Amit Maheshwari, tax partner at tax and consulting firm AKM Global, said entering into an APA would give businesses comfort about their transactions, whereas without an APA, litigation could increase. “While steps have been taken to clear pending APA applications, the department may further liberalize the safe harbor norms so that more businesses can choose this option and reduce the administrative workload of the department.”
APAs can be unilateral agreements between the company and the Indian tax authorities or bilateral agreements involving a foreign country.
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