The government has not only received Rs 3,000 crore of additional tax from MNCs that have entered into advance pricing agreements (APAs) with it over the last five years, it has eliminated a big source of tax litigation. Between FY06 and FY15, around Rs 2.6 lakh crore were added by the taxman to the income of MNCs through what is called ‘transfer pricing adjustments’, and many of these have been settled by using APAs.
The annual report on APAs for FY18, just released by the Central Board of Direct Taxes (CBDT) says the 219 APAs resulted in MNCs accepting an extra income of Rs 10,000 crore, translating into a tax of Rs 3,000 crore.
APAs are primarily aimed at avoiding transfer pricing disputes arising from cross-border transactions undertaken by MNCs. Through these agreements, the tax department and the companies seek to resolve transfer pricing disputes in advance — before the cross-border related party transaction actually takes place.
The rate of completing the pacts, however, slowed down in FY18 compared to a year ago. While the CBDT signed 88 APAs in FY17, the number came down to 67 in FY18. The report said that one of the reasons for the dip was the increasing complexity of cases, which required more time for analyzing the relevant international transactions.
Secondly, as FE had reported earlier, the report said that the shortage of manpower at the level of additional/joint commissioners and deputy/assistant commissioners in the APA teams slowed down the processing of applications. At the end of last fiscal, there were 684 APA applications under process compared with 985 filed since the launch of the programme.
This is also reflected in the average time taken for signing unilateral APAs, which increased to 31.75 months at the end of last fiscal compared with 29 months a year ago. However, it is still better than 40.4 months of the average time taken by the US authorities for unilateral APAs.
Despite the slowing, however, India has outperformed China in finalizing APAs in the last five years. Compared to its 219 APAs since FY14, China managed to sign only 139 APAs in the 12 years between 2005 and 2016.
Of the 58 unilateral APAs entered into in last fiscal, 40 have an associate enterprise of the Indian applicant based in the US, followed by the UK with 22 applications.
APAs can be multilateral or bilateral (involving CBDT and the tax authorities of one or more countries) or unilateral (involving the CBDT only). “Majority of these applications (about 85%) are for unilateral APAs between the Indian taxpayer and the CBDT. Till 31st March 2018, 219 agreements have been entered into (199 unilateral and 20 bilateral),” the report said.