A major overhaul of international tax regulations could be on the cards. The government is examining the possibility of introducing advance pricing arrangement (APA) as part of changes in the countrys transfer pricing regulations.
A sub-group set up under the international taxation division of the Central Board of Direct Taxes (CBDT) has recommended this. Sources said the suggestions were being examined by the government which feels the time may be ripe for introducing APAs as disputes pertaining to transfer pricing were on the rise and tax authorities had gained technical competence in the last few years.
The critical objective is certainty for a taxpayer as opposed to potential litigation which leads to uncertainty. Its like authority for advance ruling under transfer pricing, says KPMG partner Sudhir Kapadia.
An APA is an agreement between a taxpayer and the tax authorities which allows both to set out in advance the method of determining transfer pricing for inter-company transactions.
Most countries allow APAs under their transfer pricing regulations as these help in resolving actual or potential pricing disputes in a cooperative manner. These also provide an alternative to the traditional dispute-resolution process.
Industry and tax experts have been demanding APAs since transfer pricing laws were introduced in the country in 2001. The government should look at a timeframe for conclusion of APAs when it introduces it to make it successful. A relationship based on trust should be established between the taxpayer and the APA authorities. Medium-term bilateral agreement with countries to make APA more effective for multinational company tax payers should also be looked at, Mr Kapadia said, adding that most countries go in for APAs.
A review of the threshold limit for selection for transfer pricing audit, pegged at Rs 15 crore at present, could also be on cards. This is because the government wants tax authorities to focus on quality in case of transfer pricing audits. The sub-group has also made recommendations on arms-length methodologies. Some of the changes suggested by the sub-group could be looked at for incorporation in the forthcoming Budget.
Transfer pricing refers to the pricing of assets, tangible and intangible, services and funds transferred within an organisation in a cross-border transaction.