GAIL Signs Five Year Advance Pricing Agreement With CBDT
GAIL (India) Limited, a state-owned company, entered into a five-year advance pricing agreement (APA) with the Central Board of Direct Taxes (CBDT) to determine the transfer pricing margin payable on its long-term LNG sourcing contract from the United States.
GAIL is India's first public sector undertaking in the oil and gas sector to successfully sign the APA.
The APA scheme was launched in 2022 to help the government achieve its goal of promoting a non-adversarial tax system and making it easier to do business in India.
According to the Income Tax Department, APA programmes are in place in a number of countries and have been in place for nearly 30 years in countries such as Canada, the United States, Japan, and the United Kingdom.
The primary goal of such programmes is to provide taxpayers with certainty regarding the transfer price of cross-border transactions conducted by such taxpayers with their group entities.
Rapid growth in international trade, facilitated by an increasing number of Multinational Enterprises, has resulted in a slew of tax disputes over the issue of transfer pricing.
An APA is a mechanism for resolving transfer pricing issues in advance, i.e., before the cross-border related party transaction occurs or, at the very least, before a dispute arises in relation to such cross-border transaction.
The tax authorities and taxpayers agree on the transfer price of goods and services transacted between group entities in advance to avoid any disputes arising from such transfer pricing.
Gail (India) is reliant on the United States for a consistent supply of LNG cargoes. The company currently has two contracts with the US for a total of 5.8 million tonnes of LNG per year, consisting of approximately 90 standard-sized cargoes.
GAIL had been struggling to replace supply from a former trading arm of Gazprom that had failed to deliver on scheduled shipments since May 2022.
Gazprom's former subsidiary, Gazprom Marketing and Trading Singapore (GMTS), signed a 20-year contract in 2012 to supply GAIL with 2.85 million tonnes of LNG per year.
Supplies under the agreement began in 2018, with the full volume expected in 2023.
However, following Russia's invasion of Ukraine, Germany seized control of Gazprom Germania in April, renaming it Gazprom Germania GMBH. Following that, without explanation, Gazprom relinquished ownership of the company and imposed sanctions.
Imports supply up to 55% of India's domestic gas demand. On the other hand, while gas currently meets only 6.2% of India's energy needs, the government intends to significantly increase this figure in order to reduce reliance on petroleum.
New Delhi is advocating for an aggressive gas purchase policy and balancing import sources, the majority of which have come from Qatar in recent years.
Qatar and the United States, the world's two largest LNG producers, currently supply India through multiple contracts. Australia, the world's third largest producer, primarily supplies China.