Advance Pricing Arrangement, Transfer Pricing and MNCs : The Implications for Foreign Investment in India

International transfer pricing controversies and subsequent litigations with taxation authorities have become the major issues in foreign investments and international technology transfers. Disputes between the taxation authorities and MNCs are mounting up as most of the MNCs are now contesting the demands raised by the taxation offices in host countries for the alleged violation of transfer pricing norms. Advance Pricing Arrangement (APA) is one such system that provides transparency, saves time and cost for both the taxation authorities and MNCs and paves the way for smooth flow of foreign investments and international technology transfers. A number of developed as also the developing countries like China have already adopted the APA system. Many other countries including India, however, still have been exploring the possibilities to adopt APA system. In this context this paper describes the concepts of transfer pricing and advance pricing arrangement and explains how taxation policies can motivate the MNCs to determine transfer pricing. Further, it explains as to how it is important for India to adopt advance pricing arrangement (APA) in the present global environment if she has to attract more foreign investments and international technology transfers