ARM LENGTH PRICE (ALP), Advance Pricing Agreement (APA), Safe Harbor

 

ARM LENGTH PRICE (ALP) PRINCIPLE:  

• ARM LENGTH PRICE (ALP) is the price at which two independent unrelated business entities execute business/economic transaction in natural/uncontrolled conditions usually corresponding to fair market price. 
• Fair Price means if the transaction is taking place as if sub.A was having transaction at same rate as if it was having with any another MNC Let it be MNC-Y. 
• The price at which such transaction takes place  is ALP.

              

In the image, sub.A and sub.B are subsidiaries of MNC X. If there is any economic transactions between sub.A and sub.B at fair price or market price ,then it is ARM LENGTH PRICE.

Advance Pricing Agreement (APA):

• Advance Pricing Agreement (APA) is an agreement between the government authorities and the MNC which determines in advance the most appropriate Transfer Pricing (TP) methodology or the arm's length price (ALP) for any  inter-subsidiary international transactions for a future period of time. 
• In case of India, this time period is five years as per the Indian Advance Pricing Agreement  regulations. 
• The main objective of the Advance Pricing Agreement (APA) is to provide tax certainty by determining an advance set of criteria applied to transfer pricing 
• Advance Pricing Agreement (APA) reduce disputes and enhances the tax revenue.

Safe Harbor wrt Income Tax: 

• Safe Harbour provide for methodologies adopted by companies in which a certain category of taxpayers can follow a simple set of rules under which transfer prices when applicable are automatically accepted by the revenue authorities.
•  A 'safe harbour', in a Transfer Pricing regime, relieves eligible taxpayers from certain complicated obligations which are otherwise imposed by a jurisdiction's general Transfer Pricing rules.

SAFE HARBOR Provisions wrt Information Technology  Act  : 

• The safe harbour provision has been given under Section 79 of the IT Act 2000. 
• It states that "an intermediary shall not be liable for any third-party information, data, or communication link made available or hosted by him". 
• Ex. Facebook will not be liable for any legal charges if any individual post any illegal comment on it .