Why is it in the news ?

The Central Board of Direct Taxes (CBDT) has signed the 300th Advance Pricing Agreement (APA) during the month of September, 2019.

  • This is a significant landmark of India’s APA Programme, which is currently in its seventh year.

Advance Pricing agreement

It is an ahead-of-time agreement between a taxpayer and a tax authority on an appropriate transfer pricing methodology (TPM) for a set of transactions at issue over a fixed period of time.

  1. The Advance Pricing Agreement (APA) programme in India was launched in 2012 vide the Finance Act, 2012.
  2. The APA Scheme endeavours to provide certainty to taxpayers in the field of transfer pricing through an agreement in advance.
  3. Such agreement is entered into by the CBDT with the approval of the Central Government, with the taxpayers on the transfer price of international transactions between associated entities.
  4. The APA Scheme continues to make good progress in providing tax certainty to MNEs. It reflects the Government’s commitment towards fostering a non-adversarial tax regime.

Types of Advanced Pricing agreements

  1. Unilateral - involving only the taxpayer and the tax authority of the country where the taxpayer is located.
  2. Bilateral - involves the taxpayer, associated enterprise (AE) of the taxpayer in the foreign country, tax authority of the country where the taxpayer is located and the foreign tax authority.
  3. Multilateral: Involves the taxpayer, two or more associated enterprises (AE) of the tax payer in different foreign countries, tax authority of the country where the taxpayer is located and the tax authorities of AEs.

Transfer pricing

It is termed as the price paid for goods transferred from one economic unit to another assuming that the two units involved are situated in different countries, but belong to the same multinational firm.