The detailed Advance Pricing Agreement rules have been in the news in recent times. With the basics of APA now behind us, it is time to focus on the most important factor influencing its success: Perspective.

A tax audit process is typically characterised by a certain level of tension between the taxpayer and the tax office. This is not unusual as tax audits are usually seen as a process to discover potential gaps in tax liability.

The APA process, on the other hand, is cooperative in nature — one where the taxpayer and tax office negotiate a pricing arrangement, that is mutually acceptable. At any point, if the parties involved disagree on the proposed arrangement, they may decideto call it off. By the same token, once an agreement is entered into, both parties are bound to it.

Taxpayers in India who have grappled with transfer pricing litigation over the past seven years expectedly greet this with scepticism, especially given the amount of information needed to be shared during the APA process. Possibly, the most likely worry in the taxpayers’ mind is: Are we starting a fire?

Today, India faces a high level of tax-related disputes. While some scepticism is necessary in a tax audit process, years of tax litigation have significantly widened the gap, leading to heightened scepticism on both sides. On one hand, the tax office would want to verify every detail provided by the taxpayer, with an unending need for documentation and evidence. On the other hand, the taxpayer is unwilling to provide information beyond the bare minimum required. The result: a virtual standoff, contributing to the unprecedented level of tax litigation.

However, it is important to understand and appreciate the difference between APA and the normal transfer pricing audit process. By bringing all relevant parties to the table in a single proceeding, the APA process can help resolve transfer pricing issues early on in a more efficient, consistent, and comprehensive manner than standard audits, appeals, or litigation processes can. However, no negotiation can be successful unless interests are aligned, and both sides display a level of trust.

Over the last couple of weeks, the revenue authority has shown a positive outlook towards the APA programme. Unlike a transfer pricing audit, which may be viewed as ‘unfriendly’ fire, the APA process ought to be seen as ‘friendly fire’ — lit to benefit all. Put another way, this is a process which would result in an amicable agreement on future pricing arrangement.

A change in outlook is critical to ensure the success of this programme. With the revenue authority all set to showcase a new face of the department (the APA office), it is important for taxpayers to meet them halfway.

Kunj Vaidya is Associate Director – Transfer Pricing, Price Waterhouse and Co

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