The rise in the number of cross-border inter-company transactions have forced governments world over to focus more on transfer pricing and the resultant disputes. Many governments regard advance pricing arrangement as a solution to the actual and potential transfer pricing problems.

During the period April-December 2007-08, foreign direct investment amounted to US$12.7 billion and foreign institutional investment to US$18 billion. Our policy is to encourage all sources of investment, domestic and foreign, private and public. In no other country is the presentation of annual budget by the government such a major spectacle as it is in India. The build-up and hoopla begin weeks before the Union Finance Minister rises to present the annual budget for the new financial year in the Lok Sabha.

The nationwide expectations, forecasts and discussions that precede the presentation of the annual budget-which is essentially a statement from the Union Government on the public revenue and expenditure and policy initiatives-are seen, otherwise, in India only before an important cricket match involving the national team or the release of a new movie starring a reigning matinee idol. It was no different this year. Among the cacophony of predictions and expectations, there was this news that the Union Government may introduce Advance Pricing Arrangement (APA) in India with an eye on reducing transfer pricing litigations between corporations and tax authorities.What does transfer pricing mean? Transfer pricing refers to the pricing of tangible and intangible assets, services and funds-such as licensing of intellectual properties and inter-company financing and loans-transferred within an organization in cross-border dealings, i.e., transactions between commonly controlled enterprises such as a parent corporation in one country and its subsidiary or sister corporation in another country.

In such international transactions between related parties, businesses can structure their dealings in such a way as to shift profits offshore and at the same time save thousands of dollars in taxes. However, transfer pricing is a double-edged sword, as it often leads to situations where the multinational taxpayers are caught between different tax regimes of two or more countries, resulting in international double or even triple taxation. As for governments, who pays tax on international business transactions and where can mean an addition or loss of millions of dollars to their exchequers.

The Analyst Magazine, Advance Pricing Arrangement, Foreign institutional investment, Advance Pricing Arrangement, APA, Union Government, multinational enterprises, Tax administrations, Alternative Dispute Resolution, ADR, Multinational corporations, MNCs, Aztec Software & Technology Services Ltd., Transfer Pricing, Income Tax Appellate Tribunal, ITAT.