The Income Tax Department has inked five advance pricing agreements with multinational companies.

Such agreements determine the transfer pricing methodology for MNCs’ international transactions such as interest payments, corporate guarantees, non-binding investment advisory services and contract manufacturing for future years and help in reducing litigation.

Transfer pricing or transaction prices between separate entities of a large company has generated a lot of heat in connection with investments made by large MNCs, such as Vodafone, Shell, WNS and Nokia.

The agreements cover a period of five years and specify the arm’s length price for the covered international transactions entered into by the taxpayers. The agreements pertain to different industrial sectors including pharmaceuticals, telecom, exploration and financial services.

The confidentiality clause of such an agreement restricts the department from disclosing the name of a company. However, the department can reveal the number of applications received for executing the agreement. The APA programme came into effect on July 1, 2012 and the first batch of 146 APA applications was received in March. The Central Board of Direct Taxes has been able to conclude the first set of agreements within a period of one year as against the internationally accepted norm of at least two years.

Appreciating such a turnaround, Vijay Iyer, Partner and National Leader (Transfer Pricing) of EY, said in some of the cases that have been concluded, the APA team has shown that they are willing to deviate from safe harbour norms if the circumstances so deem. “We would see more disposals in the next few months since the process and methodology has been ironed out,” he added.

This programme is an important step towards providing certainty to international and Indian investors, the audit firm PwC said in a statement while adding that it acted as lead advisors in two pacts that were signed. It may be noted that during the period of pact, the taxpayer is required to file an annual report to confirm compliance with the terms of the agreement. The tax authorities then conduct a limited audit of the taxpayer to ensure compliance with the pact.

KPMG’s national head of Global Transfer Pricing, Rohan K Phatarphekar, said “To my mind, the actual execution of the APAs was eagerly being awaited by taxpayers and this could have a game-changing positive impact on reducing the transfer pricing litigation in India.”

Related Topics