Advance Pricing Agreement (APA) norms, introduced in this year’s Budget, have come into effect from Aug 30, 2012, an official release said Friday.
An APA is an agreement between the income tax department and any person, which determines, in advance, the arm’s length price in relation to an international transaction
Once APA has been entered into for an international transaction, the arm’s length price for the period specified in the APA will be determined only in accordance with the APA.
The APA scheme is a finance ministry measure for bring in greater clarity in transfer pricing norms. The ministry had earlier this month notified that where the variation between the arm’s length price determined under Income Tax Act provisions and the price at which an international transaction had been undertaken did not exceed five percent of the latter, the price at which the transaction took place would be taken as the arm’s length price.
The arm’s length price is critical for companies with international operations and subsidiaries trading with each other. There is often an incentive to reduce the overall tax burden by manipulation of inter-company prices.
The APA regime had to begin from July 1 but its notification had been delayed.
India is generally regarded as among the more difficult transfer pricing destinations, with more than half the transfer pricing audits facing adjustments resulting in an additional tax demand and litigation.
The continuation of the five percent tolerance range and the APA mechanism are expected to bring in certainty and transparency to the transfer pricing process.