Context:
Central Board of Direct Taxes (CBDT) signed record 125 Advance Pricing Agreements (APAs) in FY 2023-24
Advance Pricing Agreements:
- It is an agreement between a taxpayer and a tax authority, which determines, in advance, the arm’s length price in relation to an international transaction.
- Objective – To keep a check on big multinational companies so that they do not engage in tax evasion by adjusting their profits based on their inter-corporate transactions (transfer pricing)
- Guidelines included in – Income Tax Act, 1961
- Transfer Pricing – Pricing of goods, services, or intellectual property that is sold between 2 or more companies that are part of the same multinational enterprise
- Arm’s length price – Refers to a deal in which parties act independently without one party influencing the other.
Key Features of APA:
- Voluntary in nature
- Duration – Maximum of 5 future years (further, can be extended for 4 more proceedings years).
- Types of APAs –
- Unilateral – Involves only the taxpayer and the tax authority of the country where the taxpayer is located.
- Bilateral – Involves the taxpayers, the tax administration of the host country and the foreign tax administration.
- Multilateral – Involves the taxpayers, the tax administration of the host country and more than one foreign tax administrations.
- Key Benefits –
- Supplements Double Taxation Avoidance Agreement (DTAA) mechanism for resolving transfer pricing dispute.
- Promotes ease of doing business, especially for Multi National Enterprises.
Source: PIB
Previous Year Question
With reference to ‘IFC Masala Bonds’, sometimes seen in the news, which of the statements given below is/are correct?
1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank.
2. They are the rupee-denominated bonds and are a source of debt financing for the public and private sectors.
Select the correct answer using the code given below:
[UPSC Civil Service Exam – 2016 Prelims]
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (c)
