International Transfer Pricing in India: The New Era of Advance Pricing Arrangements to Benefit Both MNCs and Taxation Authority

Abstract

The Government of India for the first time in 2001 introduced the transfer price regulations in the country with the transfer pricing audits effectively beginning from 2003 onwards. The onerous documentation requirements and stringent penalties prescribed by the regulations were a cause of concern for taxpayers for their international business transactions and this area of dispute between the taxation authority and companies has emerged as a single biggest source of courtroom battle. There has been stringent demand from the tax specialists and industry that the government to announce a clear-cut advance pricing mechanism to decide about the values of international transactions between the related parties. The Union Budget 2009 and New Code on direct taxation have introduced a few proactive and well thought out measures that can resolve the transfer pricing disputes. In this new scenario, an attempt has been made in this paper to put together and describe the concept of Transfer Pricing, Abuse of transfer pricing, Arm’s length Pricing, Safe Harbour, Advance Pricing Arrangements (APAs), Type of APAs, Benefits and Shortcomings of APAs and Amendments brought out/proposed to be brought out in TP rules. Further, the paper underscores – the implications of the proposed changes in the transfer price regulations vis-à-vis suggestions for the same and concludes that the APA mechanism will benefit both the MNCs and tax administration and will attract more foreign investment in the country.

Keywords: Transfer Pricing, Advanced Pricing Arrangements (APAs), Abuse of Transfer Pricing, Arm’s Length Pricing, Safe Harbour, Multinational Corporations and Tax Administration, International Transfer Pricing

JEL Classification: E62, F21, F23, H2, H32, H87