Tax authorities are exploring the feasibility of introducing an advance pricing arrangement (APA) to minimise transfer pricing disputes with multinational enterprises. APA is an agreement between the tax payer and the tax authority on the method to be used for pricing their future intra-group transactions.
The tax department believes that APAs will be a useful method to mitigate unnecessary transfer pricing litigations, states the latest global transfer pricing survey by Ernst & Young. The input is based on a feedback from domestic tax authorities.
Transfer pricing refers to the price charged by an MNC to an associated enterprise for supply of goods and services. Since transfer prices can be used to shift profits out of India and hence avoid taxes, the tax department has a regulation in place since 01 to check violations.
The law mandates MNCs to price their transactions with associated enterprises according to the arms length principle. This means applying prices that independent enterprises would charge in identical transactions in the market place.
Transfer pricing controversies are of significant concern for corporates in todays globalised economy and India is no exemption. Disputes are mounting as most MNCs are contesting demands raised by tax authorities here for alleged violation of transfer pricing norms.
According to experts, APA provides legal certainty and stabilises the tax environment for MNCs. The programmes are designed to resolve actual or potential transfer pricing disputes in a co-operative manner. Many advanced countries have this mechanism and India is mulling over its introduction. APAs may be unilateral, bilateral or multilateral.
MNCs have experienced two years of transfer pricing audits in India. Adjustments to the tune of $500m were made in for FY03. The audits focused mainly on companies with large transaction volumes. Currently, appeals are the only effective means of handling transfer pricing disputes, according to the 05-06 transfer pricing survey covering more than 30 countries.
The key message of the survey is that tax authorities broadly agree on transfer pricing principles, but not transfer pricing practices. This means they adopt different approaches in the application of these principles.
A host of new countries including China, Columbia, Israel and Turkey are coming into the transfer pricing enforcement field. Old guard such as Canada, New Zealand and UK with established transfer pricing regimes are making major changes in approach. There is evidence of increasing sophistication in data-gathering by tax authorities to augment enforcement efforts, says the survey. It states that transfer pricing will remain the most important international tax issue for MNCs.