Feel free to use this image, just link to www.SeniorLiving.Org

In this blog post, Mayank Garg, a student pursuing his BBA LLB (3rd Year) at University of Petroleum and Energy Studies, Dehradun and a Diploma in Entrepreneurship Administration and Business Laws by NUJS, analyses the advantages of advance pricing agreements.



With the rapid development of the country’s indirect taxes on trade, consumption, etc., were the most important types of taxes in the beginning of twentieth century. Since then the trend has been an increasing importance of the income taxation. Introduction of the Transfer Pricing Provisions was done in India in year 2001 which provided for the determination of arm’s length price in cases of international transactions between associated enterprises.

Download Now

The Finance Act, 2012 has inserted sections 92CC and 92CD in the Income-tax Act, 1961 introducing the provisions of Advance Pricing Agreements to bring about uniformity in determination of arm’s length price of the international transactions. Sections 92CC and 92CD came in effect from 1-7-2012. Section 92CC inserted by the Finance Act, 2012 with effect from 1-7-2012 provides that the CBDT may, with the approval of the Central Government, enter into an APA with a person, determining the arm’s length price or specifying the manner in which the arm’s length price is to be determined, in relation to an international transaction to be entered into by that person.

Advance Pricing Agreement

“Advance Pricing Agreement” is an agreement between a taxpayer and a taxing authority on an appropriate transfer pricing methodology for a set of transactions over a fixed period of time in future. The APAs offer better assurance on transfer pricing methods and are conducive in providing certainty and unanimity of approach”.

An APA as referred to by the OECD in its 2010 transfer pricing guidelines is “an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time”.

The Internal Revenue Service defines an APA as “An APA is an agreement between a taxpayer and the ‘service’ in which the parties set forth, in advance of controlled transactions, the best Transfer Pricing Method within the meaning of section 482 of the Code and the regulations. The agreement specifies the controlled transactions or transfers (covered transactions), TPM, APA term, operational and compliance provisions, appropriate adjustments, critical assumptions regarding future events, required APA records, and annual reporting responsibilities.”

The basic idea of an APA is to increase the efficiency of tax administration by motivating taxpayers to present before the tax authorities all the facts relevant to a proper transfer pricing analysis and to work towards a mutual agreement. APA reduces the burden of compliance by giving taxpayers greater certainty regarding their transfer pricing methods, promoting their issues and by allowing them discussion and resolution in advance before the tax authorities.

Unilateral, Bilateral, or Multilateral

Some countries allow unilateral arrangements where the tax administration and the taxpayer meet and finalize an arrangement. A unilateral APA, however, may affect the tax liability of associated enterprises in other tax jurisdictions. Where unilateral APAs are permitted, the competent authorities of other interested jurisdictions should be given an option to determine whether they are willing and able to consider a bilateral arrangement under the mutual agreement procedure.

In any event, countries shouldn’t embrace any unilateral APA with a taxpayer with a requirement that the payer should waive off access to the mutual agreement procedure if a transfer pricing dispute arises. Also, if another country raises a transfer pricing adjustment with respect to a transaction or issue covered by the unilateral APA, the first country is encouraged to consider the appropriateness of a corresponding adjustment and not to view the unilateral APA as an irreversible settlement. The OECD guidelines provide that because of concerns over double taxation, most countries prefer bilateral or multilateral APAs, and some countries will not grant a unilateral APA to taxpayers in their jurisdiction. The bilateral approach is far more likely to ensure that the arrangements will reduce the risk of double taxation, will be equitable to all tax administrations and taxpayers involved, and will provide greater certainty to the taxpayers concerned.

Unilateral APAs are one-sided tools addressing problems with bilateral implications. Bilateral APAs give larger tax certainty and address the total scope of a dealings and are favored over unilateral APAs, though unilateral APAs are also helpful in certain circumstances, like covering problems or transactions wherever no applicable tax convention exists, they will have restricted utility wherever tax administrations actively review the sort of transactions being lined. As mentioned earlier, it’s best for both, taxpayers and tax administrations to avoid the inclusion of a discharge of access to MAP in audit settlements. Since MAP involves bilateral problems it’s inappropriate to own two parties (the remunerator and tax administration) not embodying a third concerned party (the alternative tax administration) within the final resolution of a problem. 1st of all taxpayers might not understand the potential implications of double taxation and also the indisputable fact that associate adjustment by the opposite tax administration might complicate the problem. Secondly, tax administrations ought to take into account the problems of co-operation and reciprocity similarly, because the indisputable fact that those one-sided settlements will not serve tax administrations well at the end of the day. As for unilateral APAs, if a foreign adjustment is raised against a transaction or issue covered by a unilateral APA, the unilateral APA should be treated as the taxpayer’s filing and, therefore, eligible for MAP and adjustable, as opposed to an irreversible settlement. Wherever possible, an APA ought to be all over on a bilateral or multilateral basis between competent authorities through the mutual agreement procedure of the relevant treaty.

A bilateral APA carries less risk of taxpayers feeling compelled to enter into an APA or to just accept a non-arm’s length agreement, so as to avoid high-priced and prolonged enquiries and possible penalties. A bilateral APA considerably reduces the possibility of any profits either escaping tax altogether or being doubly taxed. Moreover, concluding an APA through the mutual agreement procedure may be the only form that can be adopted by a tax administration which lacks domestic legislation to conclude binding agreement directly with the taxpayer.

Universal trends in Advance Pricing Agreements

United States – In March, 1991 the Internal Revenue Service published Revenue Procedure that authorized APA contracts. A taxpayer is given flexibility to request a pre-filing conference. Detailed documentation requirements are ordered. As a part of the contract, the payer agrees to provide annual reports demonstrating company’s compliance with the APA, particularly highlighting the acceptable application of the chosen Transfer pricing methodology. The payer is liable for suggesting the initial amount that they require their APA to last; the particular beginning date is at the taxpayer’s discretion. The conclusion may be a Memorandum of Understanding between the Governments and also the payer. Once this in agreement, the payer has the instrument mixed up, the APA, and also the final act is the execution of this instrument. Internal Revenue Service can revoke an APA within the event of fraud or actus reus.

To increase quality of the APAs the Internal Revenue Service has planned to create public copies of APAs, however, solely when removing details like the taxpayer’s identity, trade secrets, and confidential industrial or monetary info, the APA procedures are changed to expand the scope of the APA Program’s ambit to incorporate alternative problems that transfer evaluation principle is also relevant, including: attribution of profits to permanent institution underneath an income-tax accord, determination of the quantity of financial gain effectively connected with the conduct by the payer of a trade or business within the United States.

United Kingdom – The UK has formal APA procedures since 1999. The United Kingdom APA method solely comes into play to resolve complicated transfer pricing problems or in alternative, in cases wherever there is important issue in distinguishing the strategy to be utilized in applying the arm’s length principle. APAs could involve transfer valuation strategies covering differing types of connected party transactions or for specific forms of transactions solely, in addition as alternative, intra-group arrangements, together with transfers of tangible or intangible property and also the provision of services.

There are prospects to conclude bilateral or unilateral APAs with preference for a bilateral/multilateral approach. Conjointly there’s ability to roll back application of the APA to earlier years only if the primary emphasis of an APA is to provide certainty for 3 to 5 years.

Canada – Started a formal APA program in July, 1995. There’s a powerful preference for bilateral or multilateral APAs if the foreign jurisdiction conjointly has an APA program. The 2011-12 annual report on the APA program published by the Canada Revenue Agency reports that since the origin of the program, 156 cases have been accepted, 108 completed (85 bilateral, 21 unilateral and 2 multilateral), and 3 are unresolved.

China – Is one amongst the full-fledged countries within the world of transfer pricing. The method of executing APA in China appears almost like that within the United States with a preparation stage, formal application stage, audit and assessment stage, negotiation stage, conclusion stage. Most of the APAs up to now have been unilateral, together with APAs involving multi-jurisdictions among China, 5 bilateral APAs are over, together with 2 with Japan, one with the United States and 2 with Korea.26

Japan – The Japanese National Tax Administration Agency (NTA) actively encourages taxpayers to use for APAs. Along with United States, Japan in all probability has the foremost expertise with APAs.27 The subsequent options characterize the APA regime: anonymous prefiling conferences are possible; typical APAs cowl 3 to 5 years; Rollbacks to past years area unit, in general, feasible; key documents should be submitted in Japanese; profit-based and alternative strategies not laid out in Japan’s transfer pricing regulations are often accepted in bilateral APAs.

To encourage the use of Advance Pricing Agreements, the NTA has also launched international information divisions in Tokyo and Osaka. The number of APA applications submitted to the NTA has been increasing steadily – from 93 in 2007 as compared to 22 in 1997. The NTA also processed 70 applications in 2007 as against 5 in 1997.

Merits of an APA mechanism


  • Obtains certainty for complex, high risk transactions– APA is considered as a strategy to minimize the risk of a transfer pricing adjustment; provide certainty through a negotiation process. An APA can be undertaken by companies that have complex inter-company transactions; high degree of transfer pricing  adjustment risk that may result in penalties or for companies that desire for certainty with regard to their transfer pricing policies.
  • Avoids double taxation – The pricing of goods and services by multi-nationals for transactions among themselves is generally governed by a global pricing policy. The policy typically ensures to provide an arm’s length return to various constituents of the MNE group, based on the functions performed, assets employed and risks assumed by each member of the group. Whenever a revenue authority in a particular jurisdiction challenges and disputes such pricing policy and raises a consequential demand, it leads to double taxation for the Group. The process of APA also seeks to do away with this tax risks.
  • Reduces compliance costs, etc. – Reduces compliance cost and costs associated with audit and appeals over the APA term by eliminating the risk of transfer pricing audit and resolving long drawn and time-consuming litigations.
  • Reduces the burden of record keeping – Reduces the burden of record keeping, as taxpayer knows in advance the required documents to be maintained to substantiate the agreed terms and conditions of the agreement.
  • Competent authority guides in negotiating – Competent authority analyst with knowledge of negotiating with the other country guides in the case from the outset and allows one competent authority to act as a counterbalance for another.



Transfer pricing is inherent in the way the world economy is structured, with sourcing and consuming destinations being completely different, with varied organizations operating in multiple countries and most significantly as a result of varied tax and alternative laws in numerous nations. Conjointly nations ought to attain a fine balance between loss of revenues with the sort of outflow of tax and creating for their country an attractive investment destination by giving flexibility to transfer pricing.

When the transfer pricing rules were introduced in 2001, this subject was completely unknown. The heavy documentation needs and tight penalties prescribed by the rules were reasons for concern for any taxpayer having international transactions significantly as there was no basis of knowing how the law would be enforced.

At present, Indian transfer rating rules don’t have a particular provision for handling the transfer pricing of intangibles. Sub-section (2) of section 92 is an omnibus provision handling intra-group arrangements for services, price allocations, price contributions, etc.

Also, the 5 prescribed transfer pricing methods are usually not found adequate to deal with the transfer pricing problems associated with intangibles. Consequently, in line with international observations and OECD principles, steerage ought to be issued to acknowledge certain methodologies/approaches for evaluating the arm’s length character of transactions involving intangibles.

Time has come to have a relook into the provisions and settle these controversies in order that there is a lot of certainty and fairness in the manner in which the law will be applied.

Moreover, the introduction of measures like Advance Pricing Agreements (APAs) and safe harbor benchmarks certainly have helped us in orientating our transfer pricing rules to OECD guidelines and alternative international best practices, including a forceful reduction in the penalties. It would go a long way in enhancing India’s name as an attractive foreign direct investment destination – a goal which successive governments wanted to achieve.

Since the objective of an APA is to deliver certainty, for each of the taxpayer and the tax authorities, an APA scheme is a welcome amendment which will introduce larger certainty in the transfer pricing regime in India that has seen an increasing volume of disputes and litigations in recent times.

The variance in tax rates across different countries prompts several corporations that operate in one country to shift their profits to low-tax locations. This leads to tax revenue loss to countries with high tax regimes. Transfer pricing legislation is employed as a tool to curb tax avoidance by manipulating costs charged on intra-group cross-border transactions in such a way to maximize the taxable profits in low tax jurisdictions and to minimize such profits in high tax countries. The author after doing a close analysis of TP provisions opines that, though the TP provisions are complete in several respects and are generally in line with international practices prescribing methodologies, documentation needs and penalties, yet they fail to produce the taxpayer for the ability of getting APA and don’t specifically address to things like intangibles, e-com, international trading derivatives and so on, that need special attention. The author suggests that as transfer pricing is a necessary tax provision, to urge our share of revenue from international transactions, it ought to be administered with sensitivity as to not kill the goose that lays the golden eggs.


Please enter your comment!
Please enter your name here