One of the disputed issues in taxation related to MNCs is the area of intra company transactions. The pricing of goods and services between two related companies is called transfer pricing.
Here, a parent company say in Japan may charge a convenient price from its subsidiary in India to minimise its tax payment in India. For example suppose that Maruti Suzuki India has higher profit and has to pay higher tax to the Government of India. In this case, if Suzuki Japan charges a high price for a component it sold to Maruti, profit of Maruti will come down and the tax payment of the company to GoI will also come down. On the other hand, the revenue of Suzuki Japan will go up. Altogether, the Suzuki Motor Coroporation (SMC) who owns India’s Maruti improves is position; but GoI’s tax revenue affected.
To avoid such a manipulation, tax department of India presets the price charged for different components between Maruti and SMC. At the beginning of a year, the price charged for intra company transactions will be determined in advance and will be kept for the coming five years or so. This price arrangement between Maruti and India’s tax department is called advance price agreement.
What is APA?
An APA is a contract, usually for multiple years, between a taxpayer and at least one tax authority specifying the pricing method that the taxpayer will apply to its related-company transactions. These programmes are designed to help taxpayers voluntarily resolve actual or potential transfer pricing disputes in a proactive, cooperative manner, as an alternative to the traditional examination process.
What are the benefits of APA?
APAs gives certainty to taxpayers, reduce disputes, enhance tax revenues and make the country an attractive destination for foreign investments. These agreements would be binding both on the taxpayer as well as the government. Similarly, they lowers complaints and litigation costs.