Applications for agreements aimed at preventing tax disputes between multinational companies and Indian authorities have piled up at the tax office owing to covid-19 disruptions.
Around 700 are pending, but despite the seemingly high odds, the central board of direct taxes (CBDT) hopes to clear a record number of these agreements, called advance pricing agreements (APAs), in 2022-23. A total of 62 APAs were signed and cleared in 2021-22 and 31 in 2020-21. Of the 62 APAs in FY22, around 30 were signed in March alone.
A government official said site visits could not take place due to the covid-19 restrictions, which led to cases piling up. “The APA cases have piled up and could be close to 700 odd cases. We lost close to six months last year due to covid-19 restrictions. However, the process has picked pace. We could see a record number of APAs get signed this year. The last high was 88 cases in 2016-17,” said the official.
APAs seek to provide certainty to multinational companies in respect of the transfer price of the cross-border transactions undertaken by these companies with their group entities. The agreements are made in advance between a taxpayer and the tax authority on pricing transactions between related parties.
In simple terms, the transfer price of goods and services transacted between group entities is agreed upon in advance by the tax authorities and the taxpayers to prevent any disputes later. APAs provide certainty to the company operating in India for a maximum of nine years (prospective five years and four roll-back years).
Vijay Iyer, partner and national leader, Transfer Pricing, EY India, said, “APAs picked pace in March and then it has slowed down again. We are hoping that they will pick up again soon. With 62 APAs signed last year, at that pace, it will take nearly 10 years to clear the backlog, which is not good for tax certainty.”
He pointed out that a few structural changes were needed, including increased manpower. Currently, there are four commissioners and four joint commissioners. “We need more joint commissioners. A pyramid structure is needed for faster clearance,” said Iyer. According to him, APAs give confidence to investors to expand operations in view of the non-adversarial tax regime.
Akhilesh Ranjan, a tax policy adviser at PwC India, pointed out that APAs are the cornerstone of a tax policy built around predictability and certainty. “Looking at the large inventory of pending APA applications, I think it’s time for the CBDT to augment the APA workforce,” he added.
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 programme has gone up to 421. The scheme came into effect in August 2012.
“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 transactions year after year- for the period of the agreement,” said Neeru Ahuja, partner with Deloitte India. Queries emailed to CBDT remained unanswered till press time.
Amit Maheshwari, a tax partner at AKM Global, a tax and consulting firm, said that entering into APAs will give businesses a level of comfort about their transactions, whereas, without APAs, litigation may go up. “While steps are taken to clear the pending APA applications, the department could also make the safe harbour norms more liberal so that more businesses opt for this option and reduces the administrative workload of the department,” he said.
APAs could be a unilateral agreement between the company and Indian tax authorities or a bilateral agreement involving a foreign country.