India signs record APAs in FY23 to provide tax certainty for multi-national firms

The fast-growing Indian economy is home to many multinational enterprises (MNEs) that engage in frequent commercial transactions with their parent and subsidiary companies based in foreign countries. These MNEs engage in various transactions such as transfer of raw materials, intermediate and capital goods, provision of technical, software & IT services, marketing, consultancy services or repair & warranty services and so on with their group companies abroad. Often, these transactions are subject to tax liability in India and majority of these transactions give rise to tax disputes and litigation on the valuation of these intra-group or related party transactions

In order to prevent such litigation, provide tax certainty and improve ease of doing business, Government of India introduced Advance Pricing Agreement (APA), which is an effective instrument to prevent tax disputes, in 2012. Since then, 516 APAs have been signed, of which 420 are unilateral and 96 are bilateral. Unilateral agreements are signed by the Indian tax authority with the Indian tax payer, while bilateral agreements are signed with countries with which India has a double taxation avoidance agreement (DTAA).

Key facts about Advance Pricing Agreements (APA)

Record year

The year 2022-23 was a landmark year for India as the tax department signed a record 95 APAs, the largest annual number ever since the programme was introduced in 2012, according to the latest Annual Report on APAs released by the tax department. Of these, 32 were bilateral agreements, while 63 were unilateral agreements. Multinational companies in the service sector, especially IT and software services, are the major signatories of unilateral agreements, followed by pharmaceutical or chemical companies. Companies have signed unilateral agreements mostly for transactions such as reimbursement or recovery of expenses, provision of IT enabled services, purchase of capital goods, software or other assets, payment of interest on borrowers etc.

APAs cover cross-border transactions of India-based multinational companies that have Associate Enterprises (AEs) across many countries. The 63 unilateral agreements signed in 2022-23 were for transactions of India-based MNEs with their AEs based across 130 countries. USA, China, UK, France, Germany, Singapore and Netherlands are the top seven locations of these AEs.