Advance Pricing Agreements will facilitate international transactions

    The government's reported decision to have Advance Pricing Agreements (APA) on transfer prices from April next year is welcome. An APA is an agreement between a taxpayer and the tax authority to compute transfer prices, in advance, for transactions within a group company. This makes eminent sense as companies would know their tax dues upfront. APAs would lend 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, thereby lowering compliance and litigation costs. It would also obviate the need to have safe harbour rules whereby tax authorities accept transfer prices declared by companies. APAs would work like advance rulings in income tax or customs that enable companies to plan their tax affairs and avoid litigation. APAs should work well, as have advance rulings. They would also help curb tax haven abuse, given that many multinational companies enter into a series of transactions to move funds to their arms in countries where income-tax rates are significantly lower than in India. They could buy services from their arm here at less than the market price or fair value and sell it at a higher price outside, thereby booking profits outside the country. Such `transfer prices' between `related parties' are used to shift profits out of India. Rightly, therefore, the tax department has been asking MNCs to pay more tax for under-reported incomes in India. The increasing confrontation between the taxpayer and tax authorities appears to be the trigger for the finance ministry to clear the proposal on APAs.
However, the government should have rules in place to enable its rollout from April 1 next year. In parallel, it should also ensure speedy resolution of transfer pricing disputes. And this calls for strengthening the existing dispute resolution mechanism. Compliance will improve when tax laws are simple, clear and transparent. So, the government should push for more tax reforms in the coming Budget.