The APAs dictate the pricing mechanism or margins to be maintained while dealing with overseas parent or another group entity. At a time when the margins across industries are under pressure, maintaining the pre-decided margins under APA and paying tax on it could pose to be a challenge in the current environment, say tax experts.
“Foreign related parties may like to renegotiate margins and for the Indian entities to bear more risk and consequently take a hit on their margins. Lately, there has been a tendency to categorise Indian units as low risk service providers/distributors and report profits on-year which may undergo a change for the current financial year and possibly even the next one,” said Amit Maheshwari, partner, AKM Global.
As a transfer pricing mechanism, APA has had a great run in last seven years and about 300 of those were signed by the Central Board of Direct Taxes (CBDT) with leading globocorps. Many multinationals have started approaching lawyers to see how exactly they can exit or renegotiate these contracts.
“For any contract there is always an exit clause and many multinationals that had entered APAs would look at those. Either the government can come out with some leeway around those or the multinationals may have to again renegotiate the APAs due to Covid-19 situation,” said Amit Singhania, partner at Shardul Amarchand Mangaldas.
India has used APAs to reduce transfer pricing disputes.
Transfer pricing is essentially the price paid by the parent company or its foreign arm to a local subsidiary for transactions between in-house entities.
In most cases, the local entity charges a mark-up at arm’s length, or at a price as per industry average for transactions between group companies.
