APAs may remain relevant despite expanded safe harbour regime

Experts say advance pricing agreements will continue to be preferred by large firms for flexibility, certainty, and cross-border alignment despite simplified safe harbour rules

Following the expansion of the safe harbour regime in Union Budget 2026, experts say advance pricing agreements (APAs) will continue to remain relevant. This could particularly be the case for large corporations with complex structures, as they offer flexibility, multi-year certainty, and alignment with foreign tax jurisdictions. An Advance Pricing Agreement (APA) is an arrangement wherein a company and the tax department agree in advance on how prices will be set for transactions between related companies across countries (also called transfer pricing), so as to avoid disputes later.

 

The Centre in Budget 2026 rationalised the safe harbour regime by introducing a uniform mark-up of 15.5 per cent on operating costs for all Indian entities providing information technology (IT) services (including software development, IT enabled services or ITeS, knowledge process outsourcing or KPO, and software-related contract research & development) to associated enterprises, along with a significantly relaxed revenue threshold of ₹2,000 crore and a simplified single-category approach valid for five years. The safe harbour regime features a pre-determined profit margin for certain transactions.

 

Complementing this, a new safe harbour provision of 15 per cent on costs has also been introduced for resident Indian entities rendering data centre services to their related foreign enterprises, typically supporting global cloud operations. In addition, on March 24, the Centre also issued an office memorandum allowing taxpayers to opt for the revised safe harbour regime from their APA framework, adding flexibility to the system.

 

However, experts note that companies engaged in complex transactions or those exceeding the revenue threshold of ₹2,000 crore are likely to prefer APAs. According to the Central Board of Direct Taxes (CBDT), this year the department signed a record 219 APAs. Out of these, 84 were bilateral APAs, which is higher than the 65 signed last year. These agreements were made with 13 countries including the US, the UK and Japan. For the first time, India signed bilateral APAs with France, Ireland, Indonesia and Sweden. With these new signings, the total number of APAs in India has crossed the 1,000 mark and now stands at 1,034.

 

Why large enterprises may prefer APAs

 

Vijay Iyer, partner and national transfer pricing leader at EY India, said the government’s approach signals a clear shift towards a more non-adversarial tax regime, reflected in the record number of APA signings in FY26. He noted that while safe harbour reforms may reduce fresh APA filings — particularly among smaller global capability centres (GCCs) — large and complex businesses will continue to rely on APAs for customised outcomes and long-term certainty.

 

According to Tarun Arora, partner with Deloitte India: "APAs could still be a preferred regime for many multinationals due to their case specific tailored outcome which is not possible in safe harbour, such as negotiated credit period, coverage of other inter-company transactions, negotiation on the notional cost to be considered in respect of free of cost assets and services, etc.”

 

Further, an APA provides tax certainty for past years under litigation while the safe harbour regime provides coverage only for future period from 2026-27 (FY27) onwards. Additionally, a bilateral APA also allows multinationals to avoid double taxation at the group level and helps them achieve tax certainty even in the associated enterprise jurisdiction, as per Arora. 

 

"Undoubtedly, safe harbour is a taxpayer friendly, simplified, and beneficial regime for IT and ITeS sector. Therefore, both the regimes have their own advantages, and the taxpayers should evaluate the regime to be opted for. Needless to say, the unique facts and circumstances of each taxpayer would be a key consideration in this evaluation.” Arora added.

 

Echoing these views, Kunj Vaidya, partner with Price Waterhouse & Co LLP, said, “The APA programme remains critical for complex and high-value cases where certainty is paramount. The revised safe harbour rules, along with the recent office memorandum, should ease pressure on the APA pipeline by offering simpler alternatives without compromising future outcomes. Together, this is likely to accelerate closure of pending APA cases, building on the strong momentum seen in the March 2026 cycle and reinforce India’s commitment to ease of doing business.”

 

Looking ahead, APAs are likely to remain the preferred route for large and complex businesses, especially those with significant cross-border transactions or a history of transfer pricing disputes, where the benefits of customisation and multi-jurisdictional certainty outweigh higher setup costs. At the same time, the enhanced safe harbour regime is likely to attract small- and mid-sized captive units that fall within the eligible IT/ITeS categories and turnover thresholds, and may also be used by larger groups for low-risk routine operations, said Rahul Charkha, partner, Economic Laws Practice.

 

Safe bet

 

• APAs in India crossed the 1,000-mark to 1,034
• APA provides tax certainty for past years under litigation while the safe harbour regime provides coverage only from FY27 onwards
• Safe harbour is a taxpayer friendly, simplified, and beneficial regime for small- and mid-sized entities in IT and ITeS sector
• It may also be used by larger groups for low-risk routine operations, say experts