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Transfer Pricing & Advance Pricing

Two associate enterprises between the different countries need to adjust inter- country income taxes and bifurcate them so that no tax evasion take place . For it transfer pricing methods are used by multinationals. There are different types six methods under which tax and income can be computed. But keeping in view the big tax penalties on giant multinational companies govt has shifted the plan from this fiscal year .

This new arrangement for taxing such transactions, known as transfer pricing, is important among multinational companies.

The new arrangement, called Advance Pricing Agreement (APA), aims to improve clarity in transfer pricing rules and reduce litigation. An APA is a mutual pact between a company and tax authorities that determines in advance the way in which intra-group transactions can be structured. The APA process was first announced in last year’s budget, and the government notified rules in August.

However, income tax disputes for both companies and individuals have soared in the recent past. Between March 31, 2009, and March 31, 2011, the amount involved in tax disputes almost doubled to Rs 4.05 trillion (one trillion equals 100,000 crore). That amount is enough to cover the government’s subsidies for two years.

Within this universe of disputes, transfer pricing is the single-largest cause of litigation for both foreign and Indian multinational companies . But tax officials say many companies accept adjustments made in transfer pricing without complaints. However, there is no data available to get a sense of where the truth lies.

Now the advance pricing assessment will prove effective . The concept of APA was introduced in the Budget 2012-13, which incorporated the basic framework in the law on the lines contained in the draft Direct Taxes Code.

The Central Board of Direct Taxes was empowered to lay down the detailed framework for India’s APA programme.

This has now been done and the Indian APA programme allows for bilateral and multilateral arrangements.

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