The Economic Times daily newspaper is available online now.

    FinMin's new rules on advance pricing agreements will help companies across diverse sectors

    Synopsis

    The finance ministry's rules on advance pricing agreements (APA) will help taxpayers determine their tax dues on cross-border transactions upfront. This is welcome.

    ET Bureau

    The finance ministry's rules on advance pricing agreements (APA) will help taxpayers determine their tax dues on cross-border transactions upfront. This is welcome. It will reduce transfer-pricing disputes that have been rising in sectors such as information technology. An APA is a pact between a taxpayer and the tax department to compute transfer prices in advance for transactions within a group. It will help companies plan their tax affairs, and gain certainty.

    The finance ministry has done well to script rules in sync with global practices. One, a company needs to hold extensive pre-filing consultations with the revenue department before entering into an APA. This is a good idea to help the taxpayer take a final decision. Secondly, the taxpayer will have flexibility on the type of APA. It can be a unilateral pact between the company and the tax department or a bilateral agreement involving a foreign country or a multilateral agreement involving more than one foreign country. Pre-filing consultations will help taxpayers in this decision too. Bilateral and multilateral agreements will lower the risk of double taxation and remove the risk of transfer pricing audits, reducing compliance costs. Thirdly, a company that enters into an APA would have to provide details of the transaction including its structure and information about the group. This will reduce the compliance burden as the taxpayer would know in advance the documents needed to maintain the terms of APA. Fourthly, an APA will be binding on both parties, but the tax department will have the right of cancellation if there are any changes in the critical assumptions. Safeguards are in order to check arbitrariness. However, intelligent use of discretion is also imperative for decision-making. This requires a mature and clean tax administration.

    The experience with transfer audits shows the need to build up expertise in the tax department to deal with finer aspects of international taxation. APAs are fact-intensive programmes that need trained manpower such as economists, statisticians, lawyers and people with good negotiating skills. These resources must be built up.

    (Catch all the Business News, Breaking News, Budget 2024 Events and Latest News Updates on The Economic Times.)

    Subscribe to The Economic Times Prime and read the ET ePaper online.

    ...more
    The Economic Times

    Stories you might be interested in