India has allowed multinationals to ascertain in advance their potential tax liability relating to transactions with their Indian arms, a mechanism that can help address the frequent transfer pricing disputes.

The Central Board of Direct Taxes, the apex direct taxes body, has announced the guidelines for advance pricing arrangements (APAs), marking a shift from aggressive approach that resulted in tax demand of over Rs 1 lakh crore on transfer pricing cases in the last two financial years. "The notification of the rules, which were much awaited, will provide greater clarity to taxpayers on the APA programme," said Vijay Iyer, Partner & Transfer Pricing Leader, Ernst & Young.

Transfer pricing refers to the pricing of assets, tangible and intangible, services, and funds transferred within an organisation in a cross border transaction to which tax administrations usually apply stringent rules to prevent transfer of income from high tax jurisdiction to low tax jurisdictions.

An APA agreement between a taxpayer and the tax authorities will set out in advance the method of determining the transfer pricing for transactions between a subsidiary and parent.

Once the company enters into such an agreement, it is absolved from the future litigation and also lot of compliance procedures. "The pre-filing consultation meeting with the CBDT would be one of the key items in the APA application process, and it is good to see that the taxpayers can get a first-hand feel of the CBDT's thoughts on proposed transactions which the taxpayers plan to enter into with their associated enterprises," Iyer said.

The APA regime, as per the guidelines, will comprise unilateral, bilateral, and multilateral programmes.

The rules will help provide certainty about their tax liability to multinationals who complained against aggressive stance of tax authorities in transfer pricing cases. The directorate of transfer Pricing had detected mispricing of Rs 67,768 crore in 2010-11 and Rs 43,531 crore in 2011-12, according to the finance ministry data. The finance ministry has already set up an APA directorate that will allow MNCs to avail the facility right away. "The APA team would include "experts" in economics, statistics, law or any other field as nominated by director general of income tax. This will surely complement the efforts of tax-payers & Revenue in concluding APAs," said Rahul Mitra, leader, transfer pricing, PwC India.

The APA regime was announced in the budget, but the framework for entering into these arrangements had to be established.

Taxpayers need to file an annual compliance report every year within a month from the date of filing the Income Tax Return.

The Income tax Officer has to complete the audit of this report within six months from the date of filing.

Experts are, however, wary about tax authorities assuming significant powers and say effectiveness of APAs would depend on the attitude of the officials.

"Success of APA would depend on how the authorities negotiating the APA would deal with the applicant especially during the pre-filing meeting and also in the initial period of filing an APA", said Mudigonda Vishweshwar, Senior Director, Deloitte in India. Tax experts have also feel some check is needed on the powers of tax authorities to amend or cancel agreements.

"The CBDT has assumed wide powers to amend the agreement including right to cancel etc. This is uncalled for, " said Mukesh Bhutani, chairman, BMR Advisors.