What is an Advance Pricing Agreement and should our India subsidiary apply for one?

An APA is a binding agreement between the taxpayer and India's Central Board of Direct Taxes that fixes the transfer pricing methodology, and often the resulting margin, for a defined set of international transactions for up to five future years — and can be rolled back to cover up to four prior years if a Rollback APA is requested. Once signed, the agreed transactions are no longer subject to TP audit scrutiny for the covered years as long as the taxpayer complies with the agreed terms and files annual compliance reports.

APAs suit subsidiaries with large, recurring, or structurally complex related-party transactions — intra-group royalties, management fee arrangements, or high-value contract manufacturing — where the cost of multi-year litigation risk and uncertainty outweighs the time and cost of the APA process itself, which typically runs one to three years from application to signing. For smaller or more routine transactions, safe harbour rules or standard contemporaneous documentation are usually a faster, lower-cost way to manage the same risk.