APA Considerations with comments

Considerations before opting for Advance Pricing agreement ( APA)

Taxpayers, before deciding on APA, sometimes miss out on certain aspects which has to evaluated in advance through a feasibility study, on the pros & cons. Key areas warranting consideration:

1. Safe Harbour Rules: ~30% of UAPAs concluded in FY 22-23 was by IT sector, indicative of APA inventory. Taxpayer in IT sector, with international transactions < INR 200 crs should consider option of Safeharbour (17/18%), as arbitrage in outcomes under APA is almost Nil/reducing (>17%).
2. Free of Cost Assets (FoC): Different position / strategy can be adopted by business on FoC, but one has the opportunity to defend the position in normal litigation route. In APA, mark-up on FoC is required to be received by Indian business, i.e., suo-moto acceptance of FoC in its operations when signed off. Implications of such acceptance from GST perspective include 18% GST & interest (approx. 6-8%, if APA concludes in 3-4 years) to be paid – effectively ~28% on FoC per annum (without rollback). This is an immediate outflow post APA sign-off. If APA is concluded in 3rd year, availing input credit for GST on FoC for past years may be challenged hence can be a sunk cost. APA authorities generally attribute 2-5% of cost base as FoC.
3. Business Uncertainty: In case of commencement of new business line/ramping of operations, unless the business is able to estimate the changes with certainty, preferable to wait for it to stabilise & then opt for APA. This is because business environment is dynamic & business’s response to economic climate can impact transfer pricing aspects & can render APA outcome inoperable / futile.
4. Tenure: APA has a 5-year covered period, & if one decides for a shorter covered period say 3-years, there would be additional costs -filing, consultant fees, immediate renewal. Where APA is decided as the best dispute resolution route, there should be a very valid reason & detailed analysis documented for a shorter term. For a 10-year period, there would be 2 APA filings if full 5-year period opted, but 3 APA filings if 3-year is chosen as the covered period. This would result in artificial increase in the inventory of cases in APA and unnecessary burden on the government’ s APA resources.
5. Post APA compliances: When a cost benefit analysis is undertaken, one needs to factor the post APA compliances for every covered year as it involves additional effort & resources including filing ACR & compliance audit.

Therefore, businesses should diligently test the waters before taking the plunge for APA. The credibility and efficiency of the Indian APA programme would improve if businesses saved only non-routine or complex transfer pricing issues for APA authorities.