ADVANCE PRICING
AGREEMENTS - ECONOMY
News: CBDT signs record number of
125 Advance Pricing Agreements (APAs) in FY 2023-24
What's in the news?
●
During the fiscal year 2023-24, the Central Board
of Direct Taxes (CBDT) has accomplished a significant achievement by entering
into 125 Advance Pricing Agreements (APAs).
Key takeaways:
●
This includes 86 Unilateral APAs (UAPAs) and 39
Bilateral APAs (BAPAs).
●
This marks the highest
ever APA signings in any financial year since the launch of the APA
programme.
Advance Pricing
Agreements (APAs):
●
APAs are formal
agreements between taxpayers and tax authorities regarding transfer prices.
●
They help businesses mitigate the risk of tax
authorities challenging their transaction prices.
Types of APAs:
1. Unilateral APAs:
●
Manage risks for transactions between domestic entities, but do not guarantee protection against
double taxation for transactions with foreign entities.
●
Generally, have shorter proceedings compared to
other APA types.
2. Bilateral APAs:
●
Address risks for transactions between domestic and
foreign entities, ensuring avoidance of double taxation.
●
Proceedings are lengthier as agreement from two states is required.
3. Multilateral
Arrangements:
●
Mitigate risks for transactions involving related
entities across three or more states.
●
Offer protection for complex transactions, though
proceedings are more time-consuming.
Key Features of APAs:
●
Voluntary process supplementing other mechanisms like appeals and
Double Taxation Avoidance Agreements (DTAAs).
●
Maximum term of 9 years, inclusive of
prospective and retrospective periods if opting for roll-back mechanism.
●
Ensures confidentiality of sensitive business data.
●
Statistical data and summaries are published
without disclosing entity names.
Importance of APAs for
Businesses:
●
Provides tax certainty for determining international transaction prices.
●
Reduces the risk of double taxation through
bilateral or multilateral agreements.
●
Lowers compliance costs and transfer pricing audit
risks.
●
Streamlines documentation requirements, reducing
record-keeping burden.
Go back to basics:
India-Mauritius DTAA
Amendment:
1. Principal Purpose
Test (PPT):
●
Introduces PPT to prevent treaty abuse by denying
benefits if obtaining them was the primary purpose of a transaction.
2. Article 27B:
●
Adds Article 27B defining entitlement to benefits
and conditions for denying treaty benefits.
3. Focus on Preventing
Treaty Abuse:
●
Aims to curb tax evasion and avoidance through DTAA
abuse, ensuring benefits are not misused.
4. Uncertainty Regarding
Past Investments:
●
Lack of clarity on the treatment of past
investments under the new provisions of the DTAA.
●
Ministry of Finance yet to issue clarification on
applicability to existing investments.