ADVANCE PRICING AGREEMENTS (APAS)

The Central Board of Direct Taxes (CBDT) has signed highest ever record 125 APAs (including Unilateral and Bilateral APAs) in FY 2023-24 with Indian taxpayers. 

About Advance Pricing Agreements (APAs) 

• It is an agreement between a taxpayer and tax authority. 
• APAs endeavors to provide certainty to taxpayers in domain of transfer pricing by specifying methods of pricing. 
  • APA helps determine arm’s length price (ALP) of international transactions in advance for a maximum of five future years. 
  • Further, taxpayer has option to roll back APA for four preceding years, as a result of which, tax certainty is provided for nine years. 

• Transfer Pricing: It is the price of goods and services exchanged between companies that are under common ownership or control.
• Arm’s Length Principal of Pricing: This principle states that the price agreed in a transaction between two related parties must be the same as the price agreed in a comparable transaction between two unrelated parties.

Central Board of Direct Taxes (CBDT) in India. 

• • Genesis: CBDT is a statutory authority established under the Central Board of Revenue Act, 1963.
  • Ministry: It is part of the Department of Revenue in the Ministry of Finance.

• Functions:

• • CBDT provides essential inputs for policy and planning of direct taxes in India.
  • It is also responsible for the administration of direct tax laws through the Income Tax Department.
• Composition: CBDT consists of a Chairman and six Members.
• Location: The image indicates that CBDT is located in New Delhi.

Double Taxation Avoidance Agreement (DTAA) 

• India & Mauritius signed (not yet ratified) a protocol amending the Double Taxation Avoidance Agreement (DTAA).
• DTAA is an agreement between two countries/territories with an objective to avoid double taxation on same declared asset in two different countries/territories. 
• DTAA between India and Mauritius was first signed in 1982 and amended in 2016. 

Significance of DTAA 

• Promotion of cross-border investment by reducing tax burden on foreign investors. 
• Equitable allocation of right to tax between the ‘source’ and ‘residence’ countries. 
• Provides legal certainty on taxing international income. 

Issues associated with DTAA 

• Treaty Shopping: Takes place when residents of a country, which is not a party to the DTAA, take advantage of the provisions through indirect routes. 
• Double non-taxation: Abuse of DTAA to avoid paying taxes in both countries. 
• Differential interpretations of tax treaties leading to protracted litigations. 

Base Erosion and Profit Shifting (BEPS) 

• Refers to tax planning strategies that exploit gaps and mismatches in tax rules for tax avoidance by shifting profits from higher tax to lower tax jurisdictions. 
• Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS aims to update international tax rules and lessen opportunity for tax avoidance by multinational enterprises. 
• India signed the convention in 2017.