Advance Pricing Agreement Mechanism

The Advance Pricing Agreement programme was an important mechanism to avoid disputes within the Indian direct tax body. There are three types of advance pricing agreements: unilateral, bilateral and multilateral. The credibility of a tax administration depends to a large extent on the effectiveness of its dispute settlement mechanism. Advance Pricing Agreements has played an important role in preventing avoidable disputes. The 2012 Finance Act introduced an advance pricing agreement (APA). In introducing the provisions, the then Finance Minister said: “In a globalised economy, with expanding cross-border production chains and increasing trade within companies of the same group, the Advance Pricing Agreement (APA) can significantly reduce tax disputes and provide tax security for foreign investors.” The EU Arbitration Convention established a procedure for the settlement of transfer pricing disputes between Member States. Such disputes are double taxation resulting from an upward adjustment to an undertaking`s profits in one Member State, whereas it is not followed by an equivalent downward revision in the other Member State. The Convention provides for a dispute settlement procedure, the first stage of which is called the Mutual Agreement Procedure (MAGP). Bilateral and multilateral SAAs are generally bilateral or multilateral, i.e. they also include agreements between the taxable person and one or more foreign tax administrations, under the control of the cartel procedure (POP) established in income tax treaties. [3] The taxable person benefits from such agreements, as it is certain that the income related to the covered transactions is not subject to double taxation by the IRS and the competent foreign tax authorities. Irs policy is to “encourage” taxpayers to seek bilateral or multilateral APAs where there are provisions of the relevant authorities. An APA is an agreement between a taxable person and the tax administration of a State to establish a guarantee concerning the transfer pricing method in advance.

APAs simplify or prevent costly and time-consuming tax audits of the transactions involved. 1. advance pricing agreements aim, inter alia, to avoid transfer pricing disputes by granting the subcontracting price in advance. The lawsuit involves allowing taxpayers and their lawyer to meet with specialists from the APA department to determine whether or not the relevant facts in their case are eligible for an APA. During an APA assessment, the taxpayer and tax authorities typically verify the relevant facts, discuss the appropriate transfer pricing method for those facts, and then agree that the taxpayer will comply with them over the next 4-5 years and report the margin/price in subcontracts, unless exceptional circumstances or events occur. We will now focus on the relationship between Germany and India with regard to transfer pricing disputes and how they have developed over time. Recently, companies from both countries have developed their trade relations. India, one of the fastest growing economies in the world, offers many opportunities for German companies, which is why more than 1700 German companies are now active in India. Investment by Indian companies in Germany has also increased remarkably in recent years.

Indian companies have invested more than €6.5 billion in Germany, including in the IT, automotive, pharmaceutical and biotech sectors. Today, more than 200 Indian companies are active in Germany. There are more than 1600 Indo-German cooperations and more than 600 Indo-German joint ventures in operation. Inevitably, the number of transfer pricing disputes has continued to increase in recent years in both countries. .