India should rationalise its transfer pricing norms and introduce the concept of advance pricing arrangement (APA) to retain its position as an attractive offshoring destination, a leading tax expert has said.

Most multinationals want simple and rational transfer pricing norms as offshoring is essentially a thin margin business. The comparables that are used sometimes tend to ignore this reality, Steven E Fortier, global managing principal, global transfer pricing services, KPMG, told ET.

APA is an agreement between a taxpayer and tax authorities that allows both to set out in advance the method of determining the transfer pricing for inter-company transactions. Most countries allow for APAs under their transfer pricing regulations as they help prevent actual or potential pricing disputes in a co-operative manner.

They also provide an alternative to traditional dispute resolution. Industry and tax experts in India have demanded APAs be put in place ever since transfer pricing laws were introduced in the country in 2001. CII has pitched for APAs in its pre-Budget memorandum to Finance Minister Pranab Mukherjee.

Taxpayers should be allowed to use a method (other than prescribed by the Central Board of Direct Taxes) that is most relevant to determine arms length price in an international transaction, provided the assessee can demonstrate that such a method is more relevant to business operations or specific transactions, CII said.

Transfer pricing provisions in general require income arising from an international transaction between two or more related organisations to be calculated at an arms length price. The basic test of this is that they should be comparable to similar transactions between unrelated parties.

He pointed out that APAs provide much-needed certainty that foreign companies look for while making an investment decision. Also, APAs prevent unnecessary and protracted litigation that are going on over transfer pricing in India, he pointed.

While a sub-group set up under the international taxation division of CBDT, the apex body administering direct taxes, had made a recommendation in this regard in 2007, there has been little progress. Bilateral agreements with countries to make APAs more effective for multinational corporate taxpayers should also be looked at, he said.