According to Refinitiv Limited a Diverted Profit Tax-notices they had been served for FY 2018 by the tax authorities were unlawful because the tax authorities had used another transfer pricing method (Profit Split) than the method previously agreed (TNMM with a cost based PLI) in respect of the same services in an earlier Advance Pricing Agreement (“APA”) covering FY 2008-2014. Judgement of the Upper Tribunal The Court did not find an inconsistency between the Diverted Profit Tax-notices issued by the tax authorities in respect of 2018 and the APA covering FY 2008-2014. The appeal of Refinitiv Limited was dismissed. Excerpt “90. HMRC’s acceptance that the 2018 profits were referable to the provision of services in 2008-2014 does not therefore assist the claimants’ case. The APA had terminated and had no effect in relation to the pricing of services for the purposes of calculating profits in 2018. The referability did not mean the services had to be priced under an APA that did not have  effect.91. In conclusion there is accordingly no inconsistency between the DPT notices that HMRC issued in respect of 2018 and the APA. The DPT notices concerned an accounting period in relation to which the APA had no effect.” UK 2023 UKUT 00257 (TCC) ...

In a memorandum issued April 25, 2023, the IRS provides guidance to their employees of the Treaty and Transfer Pricing Operations practice area in the Large Business and International Division with respect to requests from taxpayers for an APA with the IRS. The guidance instructs IRS personnel on how to review and, where appropriate, accept taxpayer APA requests to align the processes for APAs to be consistent with IRS’ strategy and maximize the probability of successful, timely, and comprehensive resolution of transfer pricing issues for both taxpayers and the IRS. Visit IRS’ webpage for more information on the US Advance Pricing and Mutual Agreement Program. IRS Interim APA Guidance ...

1 February 2023 OECD published guidance on Multilateral MAP and APAs. The Manual is intended as a guide to multilateral MAP and APA processes from both a legal and procedural perspective and provides tax administrations and taxpayers with information on the operation of these procedures and suggests different approaches based on the practices of jurisdictions, without imposing a set of binding rules. The Manual is divided into the following sections: Introduction: This section comprises the outline of the project, the challenges that generally arise in multilateral cases and the overview of experiences of Focus group members based on their responses to the survey. Basis for handling multilateral MAP and APA cases: This section contains guidance on the definition of a multilateral case, the legal basis for handling multilateral cases, the request filed in multilateral cases and the connection between access to multilateral procedures and the Action 14 minimum standard. Procedural aspects to consider in multilateral cases: This section contains guidance on approaching the other jurisdictions concerned in multilateral cases, possible approaches to discussions, the coordination of procedural matters, the modalities of discussions, the interaction of available domestic remedies or procedures with multilateral cases, the implementation of agreements arising from these cases, arbitration where there is no MAP agreement and the rights and the obligations and role of the taxpayer. Examples of multilateral cases: A number of representative, simplified examples of transactions that would generally benefit from multilateral solutions Ideal timeline for a typical multilateral case: Indicative timelines for each step of a multilateral MAP or APA case in line with the guidance provided in the Manual. The Manual allows tax administrations to explore whether implementation of these procedures is appropriate considering the circumstances of their own MAP and APA programmes and to consider whether the guidance therein may be incorporated in their domestic guidance on MAP or APA processes to provide additional clarity. The Manual also outlines the actions and cooperation expected from taxpayers to allow tax administrations to consider MAP and APA cases multilaterally. OECD - Multilateral MAP and APA ...

H-Customs GmbH – the applicant and appellant – is a subsidiary of H, Japan. In the period at issue, from 17 October 2009 to 30 September 2010, H-Customs GmbH imported more than 1,000 consignments of various goods from H, which it had cleared for free circulation under customs and tax law at the defendant HZA (Hauptzollamt – German Customs Authorities). H-Customs GmbH declared the prices invoiced to it by H Japan as the customs value. Some of the imported articles were duty-free; for the articles that were not duty-free, the HZA imposed customs duties of between 1.4 % and 6.7 % by means of import duty notices. In 2012, H-Customs GmbH applied to the HZA for a refund of customs duties for the goods imported during the period at issue in the total amount of… €. It referred to an Advance Pricing Agreement (APA) concluded between it and H for transactions in the tax field and stated that the adjustments to the transfer prices carried out on the basis of the APA had not been taken into account when declaring the goods for customs clearance and that it was now doing so. The APA had already been concluded in 2009 as part of a mutual agreement procedure under the agreement between the Federal Republic of Germany and Japan for the avoidance of double taxation with regard to taxes on income and certain other taxes. The Federal Central Tax Office and the local Tax Office had approved the APA. The customs authorities had not been involved. The APA covered the sale of end products and components from H Japan to H-Customs GmbH as well as other business transactions related to the trade in goods. On the basis of the APA, transfer prices were determined for certain business transactions. In the process, H initially invoiced H-Customs GmbH a certain amount for each of the goods it supplied. The sum of these amounts was reviewed after the end of the business year and, if necessary, corrected in favour of or to the detriment of H-Customs GmbH. In this way it was to be ensured that the transfer prices stood up to an arm’s length comparison. For this purpose, the German and Japanese authorities involved chose the so-called residual profit split method at the request of H-Customs GmbH and with reference to point 3.19 of the transfer pricing principles of the Organisation for Economic Cooperation and Development. According to this method, the combined profit of H-Customs GmbH and H Japan from the audited intra-group transactions was split in two stages. In a first stage, each party was first allocated a sufficient profit to achieve a minimum return. As a starting point, the returns on sales routinely achieved by comparable companies with similar operating profiles were used. In order to calculate the routine profit to be allocated, the full cost mark-up was used as profit indicators for H and the return on sales for the applicant. After apportioning the routine profit, in a second step the remaining residual profit was apportioned proportionally according to the profit apportionment factors. After determining the routine profit and the residual profit, the target range of the applicant’s return on sales (operating margin) was set. If the applicant’s actual profit was outside the target range, the profit was adjusted to the upper or lower limit of the target range and credits or debits were made to the applicant. H-Customs GmbH’s return on sales was below the target range set out in the APA. For this reason, H-Customs GmbH and H Japan adjusted the transfer prices after the end of the accounting period for 2009/2010 by way of a credit note in the amount of … €. The report of the Main Customs Office Cologne, Federal Customs Valuation Office, to which the Fiscal Court (Finanzgericht, FG) refers in the contested judgment, states that the amount had been allocated to various product groups on the basis of an allocation key; there had been no explanation of the individual product groups. The apportionment formula applied had been specified by H; the applicant was not aware of the basis on which H had determined this apportionment formula. H-Customs GmbH had calculated the duty to be refunded in its view by reducing the sum of all original customs values by the amount of the adjustment from the APA and then applying an average duty rate of 1.02% rounded up to the original or the adjusted customs value. The refund amount sought by the applicant resulted from the difference between the two values determined in this way. H-Customs GmbH did not allocate the adjustment amount to the individual imported goods. In its decision of 4 June 2014, the German Customs Authorities rejected the refund application on the grounds that the method chosen by the applicant in the form of a global correction of the total price was not compatible with Article 29(1) of the Customs Code in conjunction with Article 144 of the Implementing Regulation. Article 144 of the Customs Code Implementing Regulation (CCIP). Due to the fact that the amount of the adjustment was not broken down by product, it was ultimately not possible to clarify and prove to which specific import goods the adjustment exactly related and in what amount it was to be made for them. By decision of 2 July 2015, the German Customs Authorities rejected H-Customs GmbH’s objection as unfounded. An appeal was then filed by H-Customs GmbH with the Tax Court. In a judgement issued in 2019 the appeal was dismissed and the assessment of the German Customs Authorities upheld. An appeal was then filed with the Bundesfinanzhof Judgement of the Bundesfinanzhof The Court dismissed the appeal as unfounded and upheld the decision of the Tax Court. Excerpts “The contested decision by which the HZA refused to refund the import duties sought by the plaintiff is lawful (§ 101 sentence 1 FGO). The applicant is not entitled to a refund of part of the duty it paid under the first ...

On 28 September 2022 OECD published a new manual for entering bilateral advance pricing arrangement (APA’s) which has been approved by the Inclusive Framework on BEPS, as well as all members of the FTA, on 6 July 2022. The Bilateral Advance Pricing Arrangement Manual (“BAPAM” or “Manual”) is intended as a guide to tax administrations and taxpayers for streamlining the bilateral APA process. In addition to detailing several Best Practices for engaging in bilateral APAs, it also includes practical resources for tax administrations and taxpayers, such as templates and examples. It provides tax administrations and taxpayers with basic information on the operation of bilateral APAs (“BAPAs”) and identifies best practices for BAPAs without imposing a set of binding rules upon jurisdictions. The best practices identified in the Manual aim to streamline the BAPA process through: Mitigating delays created by differences in the BAPA processes in each jurisdiction, where possible. Avoiding information asymmetries between competent authorities by ensuring they have access to the same information, in the same form and at the same time. Increasing transparency between competent authorities and taxpayers throughout the BAPA process. Ensuring that there are realistic expectations for competent authorities and taxpayers at each stage of the BAPA process as to the resources required and the expected timeframes to come to an agreement. The Manual does not modify, restrict or expand any rights or obligations contained in the provision of any tax convention, the OECD MTC, or the OECD TPG. To the extent any content in the Manual appear to conflict with a tax treaty, the OECD Model Tax Convention, its Commentary, the OECD Transfer Pricing Guidelines or the Action 14 Final Report, the latter document or guidance is controlling. “Best practice” is the term used in this Manual to describe what is generally thought to be the most appropriate manner to deal with a BAPA process or procedural issue. The best practices contained in the Manual are based on those best practices already undertaken by jurisdictions or put forward by taxpayers and jurisdictions as part of a consultation process rather than being developed from a unified single BAPA programme. Although taxpayers and tax administrations should ideally strive towards implementing these best practices, it is recognised that it may not always be possible to apply a best practice as described in the Manual or there may be situations where their application may not be appropriate. OECD BAPA manual ...

Eaton is an Ohio corporation with a global presence. It manufactures a wide range of electrical and industrial products. During the relevant period—2005 and 2006—Eaton had its foreign subsidiaries in Puerto Rico and the Dominican Republic manufacture certain products which Eaton then sold to its other affiliates and third-party customers. In 2002, Eaton applied for an APA related to these transactions. In 2004 the IRS and Eaton entered into the first APA which covered tax years 2001 through 2005. And in 2006 a second APA was entered which covered tax years 2006 through 2010. A few years after entering in to the APAs, Eaton reviewed its records and caught some inadvertent calculation errors. After letting the IRS know, Eaton corrected the mistakes. But the IRS thought that Eaton’s mistakes were serious enough to warrant its unilateral cancellation of the APAs for tax years 2005 and 2006. And after cancelling the APAs, the IRS handed Eaton a notice claiming a deficiency of tens of millions of dollars. Eaton filed a petition in the Tax Court, challenging the deficiency notice and the IRS’s cancellation of the APAs. The Tax Court sided with Eaton on the major issues, concluding that the IRS had wrongfully cancelled the APAs. However, the Tax Court also concluded that Eaton’s self-corrections didn’t constitute § 482 adjustments, and denied relief from double taxation. It reasoned that relief under Revenue Procedure 99-32 applies to § 482 adjustments only. An appeal was filed by the tax authorities – and a cross appeal by Eaton – with the Sixth Circuit (US Court of Appeal). Judgement of the Court The Court sided with Eaton on all issues presented, including Eaton’s claim for relief form double taxation. The Court held that (1) the IRS had the burden of proving that there were grounds to cancel the APAs under generally applicable contract-law principles and failed to meet that burden, and (2) the IRS could not impose IRC Section 6662 penalties on Eaton Corporation’s self-reported adjustments, and (3) that Eaton was eligible to claim relief from double taxation. US vs Eaton Aug 2022 Sixth Circuit ...

3. Dispute prevention and resolution in relation to the HTVI approach 34. The purpose of this guidance is to improve consistency in the application of the HTVI approach by jurisdictions, thus reducing the risk of economic double taxation. In addition to this guidance, there may be other tools at the disposal of taxpayers to avoid instances of double taxation and enhance tax certainty in HTVI transactions. 35. In particular, Chapter IV of these Guidelines discusses in detail advance pricing arrangements (APAs), which if concluded bilaterally or multilaterally between treaty partner competent authorities provide an increased level of certainty in the jurisdictions involved, lessen the likelihood of double taxation, and may proactively prevent transfer pricing disputes. Recognising the role of APAs in preventing double taxation and providing certainty to taxpayers, paragraph 6.193 of these Guidelines prevents the application of the HTVI approach when the transfer of the HTVI is covered by a bilateral or multilateral APA in effect for the period in questions between the jurisdictions of the transferee and the transferor. 36. In this regard, the Final BEPS Report for Action 14 “Making Dispute Resolution Mechanisms More Effective” (BEPS Report on Action 14) recommends as a best practice the implementation of bilateral APAs, as soon as a jurisdiction has the capacity to do so (Best Practice no. 4). Furthermore, one of the elements of the BEPS Report on Action 14 is that countries with bilateral APA programmes provide for the rollback of APAs in appropriate cases, subject to the applicable time limits where the relevant facts and circumstances in the earlier tax years are the same and subject to the verification of these facts and circumstances on audit. 37. In the event that the application of the approach to HTVI leads to double taxation, the guidance in paragraph 6.195 states that it would be important to permit resolution of such cases through access to the mutual agreement procedure under the applicable treaty. Accordingly, this guidance should be read in conjunction with Article 25 and its Commentary and the commitment made in the Final BEPS Report on Action 14. That Report describes the minimum standard on dispute resolution to which the members of the Inclusive Framework on BEPS have committed, which consists of specific measures to remove obstacles to an effective and efficient mutual agreement procedure. 38. In the context of the HTVI approach it is especially relevant that under Article 25 the mutual agreement procedure “can be set in motion by the taxpayer without waiting until the taxation considered by him to be not in accordance with the Convention has been charged against or notified to him. To be able to set the procedure in motion, he must, and it is sufficient if he does, establish that the actions of one or both of the Contracting States will result in such taxation, and that this taxation appears as a risk which is not merely possible but probable” (see paragraph 14 of the Commentary to Article 25 of the Model Tax Convention). This possibility under the applicable tax treaty may alleviate some of the concerns arising in relation to timing issues and reduce the instances of unresolved double taxation. 39. Finally, one of the best practices recommended in the BEPS Report on Action 14 and that is relevant for HTVI transactions is that, subject to the requirements of paragraph 1 of Article 25, countries implement appropriate procedures to permit, in certain cases and after an initial tax assessment, taxpayer requests for the multiyear resolution through the MAP of recurring issues with respect to filed tax years, where the relevant facts and circumstances are the same and subject to the verification of such facts and circumstances on audit ...

In addition, bilateral APAs with treaty partners should conform to certain requirements. For example, the same necessary and pertinent information should be made available to each tax administration at the same time, and the agreed upon methodology should be in accordance with the arm’s length principle ...

Between those countries that use APAs, greater uniformity in APA practices could be beneficial to both tax administrations and taxpayers. Accordingly, the tax administrations of such countries may wish to consider working agreements with the competent authorities for the undertaking of APAs. These agreements may set forth general guidelines and understandings for the reaching of mutual agreement in cases where a taxpayer has requested an APA involving transfer pricing issues ...

As discussed above, the nature of APA proceedings may de facto limit their accessibility to large taxpayers. The restriction of APAs to large taxpayers may raise questions of equality and uniformity, since taxpayers in identical situations should not be treated differently. A flexible allocation of examination resources may alleviate these concerns. Tax administrations also may need to consider the possibility of adopting a streamlined access for small taxpayers. Tax administrations should take care to adapt their levels of inquiry, in evaluating APAs, to the size of the international transactions involved ...

Wherever possible, an APA should be concluded on a bilateral or multilateral basis between competent authorities through the mutual agreement procedure of the relevant treaty. A bilateral APA carries less risk of taxpayers feeling compelled to enter into an APA or to accept a non- arm’s-length agreement in order to avoid expensive and prolonged enquiries and possible penalties. A bilateral APA also significantly reduces the chance of any profits either escaping tax altogether or being doubly taxed, Moreover, concluding an APA through the mutual agreement procedure may be the only form that can be adopted by a tax administration which lacks domestic legislation to conclude binding agreements directly with the taxpayer ...

When considering the scope of an APA, taxpayers and tax administrations need to pay close attention to the reliability of any predictions so as to exclude unreliable predictions. In general, great care must be taken if the APA goes beyond the methodology, its application, and critical assumptions. See paragraphs 4.134-4.139 ...

There are some continuing issues regarding the form and scope of APAs that require greater experience for full resolution and agreement among member countries, such as the question of unilateral APAs. The Committee on Fiscal Affairs intends to monitor carefully any expanded use of APAs and to promote greater consistency in practice among those countries that choose to use them ...

Since the Guidelines were published in their original version in 1995, a significant number of OECD member countries have acquired experience with APAs. Those countries which do have some experience seem to be satisfied so far, so that it can be expected that under the appropriate circumstances the experience with APAs will continue to expand. The success of APA programs will depend on the care taken in determining the proper degree of specificity for the arrangement based on critical assumptions, the proper administration of the program, and the presence of adequate safeguards to avoid the pitfalls described above, in addition to the flexibility and openness with which all parties approach the process ...

An APA program cannot be used by all taxpayers because the procedure can be expensive and time-consuming and small taxpayers generally may not be able to afford it. This is especially true if independent experts are involved. APAs may therefore only assist in resolving mainly large transfer pricing cases. In addition, the resource implications of an APA program may limit the number of requests a tax administration can entertain. In evaluating APAs, tax administrations can alleviate these potential problems by ensuring that the level of inquiry is adjusted to the size of the international transactions involved ...

Tax administrations also should ensure the confidentiality of trade secrets and other sensitive information and documentation submitted to them in the course of an APA proceeding. Therefore, domestic rules against disclosure should be applied. In a bilateral APA the confidentiality requirements on treaty partners would apply, thereby preventing public disclosure of confidential data ...

Problems could also develop if tax administrations misuse information obtained in an APA in their examination practices. If the taxpayer withdraws from its APA request or if the taxpayer’s application is rejected after consideration of all of the facts, any nonfactual information provided by the taxpayer in connection with the APA request, such as settlement offers, reasoning, opinions, and judgments, cannot be treated as relevant in any respect to the examination. In addition, the fact that a taxpayer has applied unsuccessfully for an APA should not be taken into account by the tax administration in determining whether to commence an examination of that taxpayer ...

Another possible concern is that an APA may allow the tax administration to make a closer study of the transactions at issue than would occur in the context of a transfer pricing examination, depending on the facts and circumstances. The taxpayer must provide detailed information relating to its transfer pricing and satisfy any other requirements imposed for the verification of compliance with the terms and conditions of the APA. At the same time, the taxpayer is not sheltered from normal and routine examinations by the tax administration on other issues. An APA also does not shelter a taxpayer from examination of its transfer pricing activities. The taxpayer may still have to establish that it has complied in good faith with the terms and conditions of the APA, that the material representations in the APA remain valid, that the supporting data used in applying the methodology were correct, that the critical assumptions underlying the APA are still valid and are applied consistently, and that the methodology is applied consistently. Tax administrations should, therefore, seek to ensure that APA procedures are not unnecessarily cumbersome and that they do not make more demand of taxpayers than are strictly required by the scope of the APA application ...

For example, an APA might seek more detailed industry and taxpayer specific information than would be requested in a transfer pricing examination. In principle, this should not be the case and the documentation required for an APA should not be more onerous than for an examination, except for the fact that in an APA the tax administration will need to have details of predictions and the basis for those predictions, which may not be central issues in a transfer pricing examination that focuses on completed transactions. In fact, an APA should seek to limit the documentation, as discussed above, and focus the documentation more closely on the issues in light of the taxpayer’s business practices. Tax administrations need to recognise that: a) Publicly available information on competitors and comparables is limited; b) Not all taxpayers have the capacity to undertake in-depth market analyses; and, c) Only parent companies may be knowledgeable about group pricing policies ...

In addition to the foregoing concerns, there are a number of possible pitfalls as described below that could arise if an APA program were improperly administered, and tax administrations who use APAs should make strong efforts to eliminate the occurrence of these problems as APA practice evolves ...

Concerns have also been expressed that, because of the nature of the APA procedure, it will interest taxpayers with a good voluntary compliance history. Experience in some countries has shown that, most often, taxpayers which would be interested in APAs are very large corporations which would be audited on a regular basis, with their pricing methodology then being examined in any event. The difference in the examination conducted of their transfer pricing would be one of timing rather than extent. As well, it has not been demonstrated that APAs will be of interest solely or principally to such taxpayers. Indeed, there are some early indications that taxpayers, having experienced difficulty with tax administrations on transfer pricing issues and not wishing these difficulties to continue, are often interested in applying for an APA. There is then a serious danger of audit resources and expertise being diverted to these taxpayers and away from the investigation of less compliant taxpayers, where these resources could be better deployed in reducing the risk of losing tax revenue. The balance of compliance resources may be particularly difficult to achieve since an APA programme tends to require highly experienced and often specialised staff. Requests for APAs may be concentrated in particular areas or sectors, e.g. global trading, and this can overstretch the specialist resources already allocated to those areas by the authorities. Tax administrations require time to train experts in specialist fields in order to meet unforeseeable demands from taxpayers for APAs in those areas ...

Another potential disadvantage could occur where one tax administration has undertaken a number of bilateral APAs which involve only certain of the associated enterprises within an MNE group. A tendency may exist to harmonise the basis for concluding later APAs in a way similar to those previously concluded without sufficient regard being had to the conditions operating in other markets. Care should therefore be taken with interpreting the results of previously concluded APAs as being representative across all markets ...

An APA program may initially place a strain on transfer pricing audit resources, as tax administrations will generally have to divert resources earmarked for other purposes (e.g. examination, advising, litigation, etc.) to the APA programme. Demands may be made on the resources of a tax administration by taxpayers seeking the earliest possible conclusion to an APA request, keeping in mind their business objectives and time scales, and the APA programme as a whole will tend to be led by the demands of the business community. These demands may not coincide with the resource planning of the tax administrations, thereby making it difficult to process efficiently both the APAs and other equally important work. Renewing an APA, however, is likely to be less time-consuming than the process of initiating an APA. The renewal process may focus on updating and adjusting facts, business and economic criteria, and computations. In the case of bilateral arrangements, the agreement of the competent authorities of both Contracting States is to be obtained on the renewal of an APA to avoid double taxation (or non-taxation) ...

Another possible disadvantage would arise if an APA involved an unreliable prediction on changing market conditions without adequate critical assumptions, as discussed above. To avoid the risk of double taxation, it is necessary for an APA program to remain flexible, because a static APA may not satisfactorily reflect arm’s length conditions ...

Another problem with a unilateral APA is the issue of corresponding adjustments. The flexibility of an APA may lead the taxpayer and the associated party to accommodate their pricing to the range of permissible pricing in the APA. In a unilateral APA, it is critical that this flexibility preserve the arm’s length principle since a foreign competent authority is not likely to allow a corresponding adjustment arising out of an APA that is inconsistent, in its view, with the arm’s length principle ...

Unilateral APAs may present significant problems for tax administrations and taxpayers alike. From the point of view of other tax administrations, problems arise because they may disagree with the APA’s conclusions. From the point of view of the associated enterprises involved, one problem is the possible effect on the behaviour of the associated enterprises. Unlike bilateral or multilateral APAs, the use of unilateral APAs may not lead to an increased level of certainty for the taxpayer involved and a reduction in economic or juridical double taxation for the MNE group. If the taxpayer accepts an arrangement that over-allocates income to the country making the APA in order to avoid lengthy and expensive transfer pricing enquiries or excessive penalties, the administrative burden shifts from the country providing the APA to other tax jurisdictions. Taxpayers should not feel compelled to enter into APAs for these reasons ...

The disclosure and information aspects of an APA programme as well as the cooperative attitude under which an APA can be negotiated may assist tax administrations in gaining insight into complex international transactions undertaken by MNEs. An APA programme can improve knowledge and understanding of highly technical and factual circumstances in areas such as global trading and the tax issues involved. The development of specialist skills that focus on particular industries or specific types of transactions will enable tax administrations to give better service to other taxpayers in similar circumstances. Through an APA programme tax administrations have access to useful industry data and analysis of pricing methodologies in a cooperative environment ...

Bilateral and multilateral APAs substantially reduce or eliminate the possibility of juridical or economic double or non taxation since all the relevant countries participate. By contrast, unilateral APAs do not provide certainty in the reduction of double taxation because tax administrations affected by the transactions covered by the APA may consider that the methodology adopted does not give a result consistent with the arm’s length principle. In addition, bilateral and multilateral APAs can enhance the mutual agreement procedure by significantly reducing the time needed to reach an agreement since competent authorities are dealing with current data as opposed to prior year data that may be difficult and time-consuming to produce ...

An APA may prevent costly and time-consuming examinations and litigation of major transfer pricing issues for taxpayers and tax administrations. Once an APA has been agreed, less resources may be needed for subsequent examination of the taxpayer’s return, because more information is known about the taxpayer. It may still be difficult, however, to monitor the application of the arrangement. The APA process itself may also present time savings for both taxpayers and tax administrations over the time that would be spent in a conventional examination, although in the aggregate there may be no net time savings, for example, in jurisdictions that do not have an audit procedure and where the existence of an APA may not directly affect the amount of resources devoted to compliance ...

APAs can provide an opportunity for both tax administrations and taxpayers to consult and cooperate in a non-adversarial spirit and environment. The opportunity to discuss complex tax issues in a less confrontational atmosphere than in a transfer pricing examination can stimulate a free flow of information among all parties involved for the purpose of coming to a legally correct and practicably workable result. The non-adversarial environment may also result in a more objective review of the submitted data and information than may occur in a more adversarial context (e.g. litigation). The close consultation and cooperation required between the tax administrations in an APA program also leads to closer relations with treaty partners on transfer pricing issues ...

An APA programme can assist taxpayers by eliminating uncertainty through enhancing the predictability of tax treatment in international transactions. Provided the critical assumptions are met, an APA can provide the taxpayers involved with certainty in the tax treatment of the transfer pricing issues covered by the APA for a specified period of time. In some cases, an APA may also provide an option to extend the period of time to which it applies. When the term of an APA expires, the opportunity may also exist for the relevant tax administrations and taxpayers to renegotiate the APA. Because of the certainty provided by an APA, a taxpayer may be in a better position to predict its tax liabilities, thereby providing a tax environment that is favourable for investment ...

Some countries lack the basis in their domestic law to enter into APAs. However, when a tax convention contains a clause regarding the mutual agreement procedure similar to Article 25 of the OECD Model Tax Convention, the competent authorities generally should be allowed to conclude an APA, if transfer pricing issues were otherwise likely to result in double taxation, or would raise difficulties or doubts as to the interpretation or application of the Convention. Such an arrangement would be legally binding for both States and would create rights for the taxpayers involved. Inasmuch as double tax treaties take precedence over domestic law, the lack of a basis in domestic law to enter into APAs would not prevent application of APAs on the basis of a mutual agreement procedure ...

Tax administrations might additionally rely on general domestic authority to administer taxes as the authority for entering into APAs. In some countries tax administrations may be able to issue specific administrative or procedural guidelines to taxpayers describing the appropriate tax treatment of transactions and the appropriate pricing methodology. As mentioned above, the tax codes of some OECD member countries include provisions that allow taxpayers to obtain specific rulings for different purposes. Even though these rulings were not designed specifically to cover APAs, they may be broad enough to be used to include APAs ...

APAs involving the competent authority of a treaty partner should be considered within the scope of the mutual agreement procedure under Article 25 of the OECD Model Tax Convention, even though such arrangements are not expressly mentioned there. Paragraph 3 of that Article provides that the competent authorities shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. Although paragraph 50 of the Commentary indicates that the matters covered by this paragraph are difficulties of a general nature concerning a category of taxpayers, it specifically acknowledges that the issues may arise in connection with an individual case. In a number of cases, APAs arise from cases where the application of transfer pricing to a particular category of taxpayer gives rise to doubts and difficulties. Paragraph 3 of Article 25 also indicates that the competent authorities may consult together for the elimination of double taxation in cases not provided for in the Convention. Bilateral APAs should fall within this provision because they have as one of their objectives the avoidance of double taxation. Even though the Convention provides for transfer pricing adjustments, it specifies no particular methodologies or procedures other than the arm’s length principle as set out in Article 9. Thus, it could be considered that APAs are authorised by paragraph 3 of Article 25 because the specific transfer pricing cases subject to an APA are not otherwise provided for in the Convention. The exchange of information provision in Article 26 also could facilitate APAs, as it provides for cooperation between competent authorities in the form of exchanges of information ...

An APA should be subject to cancellation, even retroactively, in the case of fraud or misrepresentation of information during an APA negotiation, or when a taxpayer fails to comply with the terms and conditions of an APA. Where an APA is proposed to be cancelled or revoked, the tax administration proposing the action should notify the other tax administrations of its intention and of the reasons for such action ...

Each tax administration involved in the APA will naturally wish to monitor compliance with the APA by the taxpayers in its jurisdiction, and this is generally done in two ways. First, it may require a taxpayer that has entered into an APA to file annual reports demonstrating the extent of its compliance with the terms and conditions of the APA and that critical assumptions remain relevant. Second, the tax administration may continue to examine the taxpayer as part of the regular audit cycle but without re- evaluating the methodology. Instead, the tax administration may limit the examination of the transfer pricing to verifying the initial data relevant to the APA proposal and determining whether or not the taxpayer has complied with the terms and conditions of the APA. With regard to transfer pricing, a tax administration may also examine the reliability and accuracy of the representations in the APA and annual reports and the accuracy and consistency of how the particular methodology has been applied. All other issues not associated with the APA fall under regular audit jurisdiction ...

An APA may cover all of the transfer pricing issues of a taxpayer (as is preferred by some countries) or may provide a flexibility to the taxpayer to limit the APA request to specified affiliates and intercompany transactions. An APA would apply to prospective years and transactions and the actual term would depend on the industry, products or transactions involved. The associated enterprises may limit their request to specified prospective tax years. An APA can provide an opportunity to apply the agreed transfer pricing methodology to resolve similar transfer pricing issues in open prior years. However, this application would require the agreement of the tax administration, the taxpayer, and, where appropriate, the treaty partner. Element 2.7 of the Action 14 minimum standard states that countries with bilateral APA programmes should provide for the roll- back of APAs (to previous filed tax years not included within the original scope of the APA) in appropriate cases, subject to the applicable time limits (such as domestic law statutes of limitation for assessments) where the relevant facts and circumstances in the earlier tax years are the same and subject to the verification of these facts and circumstances on audit ...

At the conclusion of an APA process, the tax administrations should provide confirmation to the associated enterprises in their jurisdiction that no transfer pricing adjustment will be made as long as the taxpayer follows the terms of the arrangements. There should also be a provision in an APA (perhaps by reference to a range) that provides for possible revision or cancellation of the arrangement for future years when business operations change significantly, or when uncontrolled economic circumstances (e.g. significant changes in currency exchange rates) critically affect the reliability of the methodology in a manner that independent enterprises would consider significant for purposes of their transfer pricing ...

Typically, associated enterprises are allowed to participate in the process of obtaining an APA, by presenting the case to and negotiating with the tax administrations concerned, providing necessary information, and reaching agreement on the transfer pricing issues. From the associated enterprises’ perspective, this ability to participate may be seen as an advantage over the conventional mutual agreement procedure ...

The cooperation of the associated enterprises is vital to a successful APA negotiation. For example, the associated enterprises ordinarily would be expected to provide the tax administrations with the methodology that they consider most reasonable under the particular facts and circumstances. The associated enterprises also should submit documentation supporting the reasonableness of their proposal, which would include, for example, data relating to the industry, markets, and countries to be covered by the agreement. In addition, the associated enterprises may identify uncontrolled businesses that are comparable or similar to the associated enterprises’ businesses in terms of the economic activities performed and the transfer pricing conditions, e.g. economic costs and risks incurred, and perform a functional analysis as described in Chapter I of these Guidelines ...

APAs, including unilateral ones, differ in some ways from more traditional private rulings that some tax administrations issue to taxpayers. An APA generally deals with factual issues, whereas more traditional private rulings tend to be limited to addressing questions of a legal nature based on facts presented by a taxpayer. The facts underlying a private ruling request may not be questioned by the tax administration, whereas in an APA the facts are likely to be thoroughly analysed and investigated. In addition, an APA usually covers several transactions, several types of transactions on a continuing basis, or all of a taxpayer’s international transactions for a given period of time. In contrast, a private ruling request usually is binding only for a particular transaction ...

Tax administrations may find APAs particularly useful in profit allocation or income attribution issues arising in the context of global securities and commodity trading operations, and also in handling multilateral cost contribution arrangements. The concept of APAs also may be useful in resolving issues raised under Article 7 of the OECD Model Tax Convention relating to allocation problems, permanent establishments, and branch operations ...

Because of concerns over double taxation, most countries prefer bilateral or multilateral APAs (i.e. an arrangement in which two or more countries concur), and indeed some countries will not grant a unilateral APA (i.e. an arrangement between the taxpayer and one tax administration) to taxpayers in their jurisdiction. The bilateral (or multilateral) approach is far more likely to ensure that the arrangements will reduce the risk of double taxation, will be equitable to all tax administrations and taxpayers involved, and will provide greater certainty to the taxpayers concerned. It is also the case in some countries that domestic provisions do not permit the tax administrations to enter into binding agreements directly with the taxpayers, so that APAs can be concluded with the competent authority of a treaty partner only under the mutual agreement procedure. For purposes of the discussion in this section, an APA is not intended to include a unilateral arrangement except where specific reference to a unilateral APA is made ...

Some countries allow for unilateral arrangements where the tax administration and the taxpayer in its jurisdiction establish an arrangement without the involvement of other interested tax administrations. However, a unilateral APA may affect the tax liability of associated enterprises in other tax jurisdictions. Where unilateral APAs are permitted, the competent authorities of other interested jurisdictions should be informed about the procedure as early as possible to determine whether they are willing and able to consider a bilateral arrangement under the mutual agreement procedure. In any event, countries should not include in any unilateral APA they may conclude with a taxpayer a requirement that the taxpayer waive access to the mutual agreement procedure if a transfer pricing dispute arises, and if another country raises a transfer pricing adjustment with respect to a transaction or issue covered by the unilateral APA, the first country is encouraged to consider the appropriateness of a corresponding adjustment and not to view the unilateral APA as an irreversible settlement ...

In sum, the reliability of a prediction depends on the facts and circumstances of each actual case. Taxpayers and tax administrations need to pay close attention to the reliability of a prediction when considering the scope of an APA. Unreliable predictions should not be included in APAs. The appropriateness of a method and its application can usually be predicted, and the relevant critical assumptions made, with more reliability than future results (price or profit level) ...

In deciding how specific an APA can be in a particular case, tax administrations should recognise that predictions of absolute future profit experience seems least plausible. It may be possible to use profit ratios of independent enterprises as comparables, but these also are often volatile and hard to predict. Use of appropriate critical assumptions and use of ranges may enhance the reliability of predictions. Historical data in the industry in question can also be a guide ...

As another example, it would not be appropriate to specify a profit split formula between associated enterprises if it is expected that the allocation of functions between the enterprises will be unstable. It would, however, be possible to prescribe a profit split formula if the role of each enterprise were articulated in critical assumptions. In certain cases, it might even be possible to make a reasonable prediction on the appropriateness of an actual profit split ratio if enough assumptions were provided ...

The reliability of any prediction used in an APA depends both on the nature of the prediction and the critical assumptions on which the prediction is based. For example, it would not be reasonable to assert that the arm’s length short-term borrowing rate for a certain corporation on intra- group borrowings will remain at 6% during the entire coming three years. It would be more plausible to predict that the rate will be LIBOR plus a fixed percentage. The prediction would become even more reliable if an appropriate critical assumption were added regarding the company’s credit rating (e.g. the addition to LIBOR will change if the credit rating changes) ...

One key issue in the concept of APAs is how specific they can be in prescribing a taxpayer’s transfer pricing over a period of years, for example whether only the transfer pricing methodology or more particular results can be fixed in a particular case. In general, great care must be taken if the APA goes beyond the methodology, the way it will be applied, and the critical assumptions, because more specific conclusions rely on predictions about future events ...

An advance pricing arrangement (APA) is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time. An APA is formally initiated by a taxpayer and requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax administrations. APAs are intended to supplement the traditional administrative, judicial, and treaty mechanisms for resolving transfer pricing issues. They may be most useful when traditional mechanisms fail or are difficult to apply. Detailed guidelines for conducting advance pricing arrangements under the mutual agreement procedure (MAP APAs) were adopted in October 1999 and are found as an Annex to this chapter. The work pursuant to Action 14 of the BEPS Action Plan to ensure the timely, effective and efficient resolution of treaty-related disputes recommended, as non-binding best practice 4, that countries should implement bilateral APA programmes as soon as they have the capacity to do so, recognising that APAs provide a greater level of certainty in both treaty partner jurisdictions, lessen the likelihood of double taxation and may proactively prevent transfer pricing disputes. In this regard, it should be noted that the country mutual agreement procedure profiles prepared pursuant to element 2.2 of the Action 14 minimum standard include information on the bilateral APA programmes ...

R. Sp. z o.o. had requested a binding ruling/interpretation regarding tax deduction for the price paid to a related entity under restructuring. The request was denied by the tax authorities, as the question – according to the authorities – could only be answered under an Advance Pricing Agreement. R. Sp. z.o.o brought the issue before the Administrative Court, where a decision in favour of R. Sp. z.o.o. was issued. An appeal was then filed by the tax authorities. Judgement of the Supreme Administrative Court The Court dismissed the appeal of the tax authorities. The tax authorities could not refuse to issue a binding ruling/interpretation on whether or not a price paid to a related party under restructuring was tax deductible. According to the Court such a question could not only be dispelled by the issuance of an Advance Pricing Agreement. Click here for English Translation Click here for other translation II FSK 990_19 - Wyrok NSA z 2022-01-11 ...

A Oy was part of the A group, whose parent company was A Corporation, a US corporation. A Oy had acted as the group’s limited risk distribution company in Finland. The transfer prices of the group companies had been determined on a mark-to-market basis using the net transaction margin method and the group companies’ operating profit on a mark-to-market basis had been determined on the basis of US GAAP, the accounting standard commonly applied within the group. The target profit level for the group’s limited risk distribution companies, including A Ltd, was set at 0,5 % in the group’s transfer pricing documentation, based on a comparables analysis. In 2011, the competent authorities of the countries of residence of the A Group’s European manufacturing companies had entered into an Advance Transfer Pricing Agreement (APA) under which transfer pricing is monitored in accordance with the Group’s common accounting standard, US GAAP, and the market-based operating profit level for the limited risk distributors is 0.5%. The tax authorities in the countries of residence of certain European limited risk distributors had also issued rulings approving a profit level of 0.5% for local distributors. A Ltd had made a deduction in its 2011 financial statements to adjust its 2010 operating profit level to match the profit level under A Group’s transfer pricing principles. The company had filed a corrected tax return for the 2010 tax year, in which the adjustment was reported as a deduction from taxable income. When the company’s tax return for the 2010 tax year had been resubmitted, the Tax Administration had considered that the company had to achieve a level of operating profit in line with market conditions on the basis of financial statements prepared in accordance with Finnish accounting legislation. In addition, the Tax Administration had removed from the comparators in the comparison file submitted by the company those peer companies whose reported annual operating profit levels had been lower than or equal to 0 %. The tax administration had set the company’s normal market operating profit at 1 %. The Supreme Administrative Court held that the level of A Oy’s arm’s length profit could be determined on the basis of US GAAP accounting standards, since the A group generally prepared its financial statements in accordance with these accounting standards and since the group monitored transfer pricing on the basis of the accounts kept in accordance with US GAAP accounting standards. The Supreme Administrative Court also considered that the prior transfer pricing agreement between the competent authorities of the countries of residence of the European manufacturing companies of the A group and the decisions of the tax authorities of the countries of residence of the other limited risk distribution companies had to be given probative value. In addition to these considerations, taking into account that loss-making peers that meet the conditions of the comparability analysis are not to be rejected merely because they suffer losses, the Supreme Administrative Court confirmed that the 0,5 % profit determined for A Ltd under US GAAP was, in the circumstances of the present case, at arm’s length. The Supreme Administrative Court did not immediately take up the issue of how to calculate the taxable income of A Oy when the company’s US GAAP profit for the financial year 2010 was 0,5 %, but annulled the decisions of the Administrative Court and the Tax Adjustment Board and the resubmitted tax return for the tax year 2010 and remitted the case to the Tax Administration for reconsideration. Click here for English translation Click here for other translation KHO2021-73ORG ...

Unique economic conditions arising from COVID-19 and government responses to the pandemic have led to practical challenges for the application of the arm’s length principle. For taxpayers applying transfer pricing rules for the financial years impacted by the COVID-19 pandemic and for tax administrations that will be evaluating this application, there is an urgent need to address these practical questions. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 (“OECD TPG”) are intended to help tax administrations and multinational enterprises (“MNEs”) find mutually satisfactory solutions to transfer pricing cases and should continue to be relied upon when performing a transfer pricing analysis, including under the possibly unique circumstances introduced by the pandemic. Accordingly, guidance have been issued focusing on how the arm’s length principle and the OECD TPG apply to issues that may arise or be exacerbated in the context of the COVID-19 pandemic, rather than on developing specialised guidance beyond what is currently addressed in the OECD TPG. The guidance focuses on four priority issues: (i) comparability analysis; (ii) losses and the allocation of COVID-19 specific costs; (iii) government assistance programmes; and (iv) advance pricing agreements (“APAs”); where it is recognised that the additional practical challenges posed by COVID-19 are most significant.   covid document ...

A range of technological solutions are available to replace and/or complement, traditional methods of communication, such as face-to-face meetings and the exchange of physical documentation, while maintaining confidentiality and security requirements. There may be situations where flexible approaches are not readily identifiable or appropriate, however, tax administrations and taxpayers should be encouraged to assess alternative approaches to maintaining progress in APA discussions on a case-by- case basis rather than defaulting to historic working methods or one-size fits all solutions. Effective use of tax administration and taxpayer resources is crucial during the period of the COVID-19 pandemic and practical experience suggests that the following have been utilised with success in certain cases: Virtual tax administration and taxpayer case conferences in the place of physical meetings (for example, telephone and video conferences) Virtual functional interviews with taxpayer’s employees Virtual taxpayer site visits in the place of physical visits (so long as the performance of adequate due diligence is not compromised) Electronic documentation sharing (via encrypted emails or electronic sharing platforms) ...

Despite these potential challenges, the value of achieving advanced certainty and effective dispute prevention through APAs remains compelling. A number of tax administrations and taxpayers have identified a variety of ways to adapt working practices in order to overcome any practical impediments to working APAs. Tax administrations and tax payers should recognise that rigid adherence to pre COVID- 19 working practises may unduly lead to significant delays in APA negotiations. Instead, innovative and flexible approaches to ensure collaborative working in order to minimise delays in concluding APAs under negotiation should be encouraged ...

The COVID-19 pandemic also presents practical difficulties for tax administrations and taxpayers currently negotiating APAs. Potential challenges may arise for a number of reasons including restrictions on domestic and international travel; enforced or voluntary working from home; or additional resource pressures as a result of efforts to manage responses to the COVID-19 pandemic ...

Where taxpayers and tax administrations are negotiating APAs that are intended to cover FY2020, all parties are encouraged to adopt a flexible and collaborative approach to determine how to take into account the current economic conditions, and the various options discussed above in relation to the revision of existing APAs will be relevant. For example, consideration could be given to agreeing a short period APA covering the period affected by the COVID-19 pandemic and a separate APA covering the post-COVID period. Another solution could be to conclude the APA for the whole period (e.g. APA period of 2020-2024) with a condition that the relevant impacts of the COVID-19 pandemic will be analysed and reported annually once they are known, and retrospective amendments to the APA made accordingly, when appropriate. Another solution could be to extend the period of the APA to mitigate the short term effect of the pandemic, depending on the magnitude and the length of such effect. Additionally, the use of a cumulative or term test throughout the APA period could be given consideration. In this context, it is important that taxpayers be transparent and disclose all relevant information concerning the impact of the COVID-19 pandemic on the covered transactions in a timely manner. The supporting documentation as mentioned in paragraph 104 of this guidance may serve as reference in this regard ...

In the current environment, taxpayers may be reluctant about continuing or initiating new APA applications. This is understandable given the significant level of economic uncertainty that many businesses face, uncertainty that for some taxpayers may mean it is not feasible to reach agreements on future APAs today. However, it is important to acknowledge the role of APAs in securing tax certainty for taxpayers and tax administrations, and in preventing future tax disputes ...

However, tax administrations are likely to respond differently to the failure to comply with the terms and conditions of an existing APA, than to the failure to meet critical assumptions.55 This may reflect differences in the procedures prescribed by an APA agreement, domestic law or procedural provision. For example, it may be the case that where there is a breach in the critical assumption the terms of the APA prescribe that it should be cancelled unless otherwise agreed, whereas, the consequence of non- compliance may be that a tax administration can choose to cancel, revoke, revise or enforce an APA. 55 Section E.3 of Annex II to Chapter IV of the OECD TPG ...

When considering the consequences of non-compliance with terms and conditions of an existing APA, tax administrations should adopt a similar approach to situations where there is a failure to meet critical assumptions. For example, when determining their response, tax administrations should consider (i) the terms of the APA; (ii) any agreement between relevant tax administrations as to how to deal with non-compliance; and (iii) any applicable domestic law or procedural provisions.54 54 Paragraph 74 of Annex II to Chapter IV of the OECD TPG ...

When engaging with tax administrations, it is important that taxpayers are transparent and disclose all relevant information in a timely manner. In so doing, they will help to maintain the non-adversarial spirit and environment that is vital to the success of APA negotiations ...

Where the critical assumptions of an APA are breached, it is important that taxpayers collect and provide tax administrations with relevant supporting documentation. Depending on the particular critical assumption and other facts and circumstances, this could include, but may not be limited to: A description of the narrowest relevant taxpayer business segment tracked by management that encompasses the entities and covered transactions involved in the APA. Forecast and actual business segment profits for the financial years ending with or within financial years affected by COVID-19. Copies showing any proposed or implemented modifications to pre-existing agreements or of new intercompany contracts among the controlled parties affecting the covered transactions. A narrative explaining the anticipated effects of the current economic conditions on an agreed transfer pricing methodology during the financial years affected by COVID-19 including whether it caused restructuring of its operations and/or changes in its risks and responsibilities, and any mitigation of the impact of the current economic conditions on the tested party by government actions or other mechanisms such as business interruption insurance. The explanation must adequately demonstrate that the impact is attributable to the economic condition during the COVID- 19 pandemic, as a mere change in business results may be caused by other factors in a taxpayer’s business and accordingly may not constitute a breach of a critical assumption. A detailed profit and loss statement (“P&L”) with a breakdown of cost of goods sold (“COGS”) and selling, general and administrative expenses (“SG&A”) and other non-interest expenses for financial years affected by COVID-19 that include the covered transactions subject to the APA. The detailed P&L may include exceptional operating costs arising from COVID-19 or income from government assistance programme, including explanation on the accounting treatment of such costs or income. Information about third party behaviour ...

As economic conditions will remain uncertain until at least the end of 2020, where taxpayers notify tax administrations of the failure to meet critical assumptions, tax administration may want to consider waiting for a reasonable period until data and information on the magnitude and longevity of the economic impact of COVID-19 are available before determining how to respond to a breach. By deferring their response, until more data and information is available tax administrations may find it easier to revise, rather than cancel, an APA ...

The timing for addressing the terms of APAs impacted by COVID-19 is important. Where material changes in economic conditions lead to the breach of one or more of the critical assumptions, taxpayers should notify the relevant tax administrations as soon as practicable after the change occurs, or the taxpayer becomes aware of the change. Early notification is encouraged in order to give the affected parties more time to try to reach agreement on revising the APA, thereby reducing the likelihood of cancellation ...

In the context of the COVID-19 pandemic, there are two situations which may lead to cancelling an APA when it is established that: in FY2020 (i) there is a material breach in an APA’s critical assumption as a result of a change in economic circumstances; or, (ii) the taxpayer failed to materially comply with any term or condition of the APA. Cancellation would not, however, be automatic and the tax administration may waive cancellation under certain circumstances.52 Cancellation would have the effect of ending an APA on an agreed date or from a particular tax year or accounting period (e.g. after FY2019). 52 Paragraph 81 Annex II to Chapter IV of the OECD TPG ...

Revocation may be considered where: (i) there is a misrepresentation, mistake or omission that was attributable to the neglect, carelessness, or wilful default of a taxpayer when filing an APA request and submission, the annual reports, or other supporting documentation or in supplying any related information; or (ii) the participating taxpayer (or taxpayers) fails to materially comply with a fundamental term or condition of the APA. The pandemic has not altered that standard. Accordingly, revocations of APAs whose terms extend into the period of the COVID-19 pandemic should be limited (just like arising in any other circumstances) to situations where the actions, as provided above53, that meet the standard for revocation regardless of whether such actions arose because of the pandemic. 53 Paragraph 77 Annex II to Chapter IV of the OECD TPG ...

In other circumstances, more general revisions may be required, depending on the specific facts and circumstances of a case, where allowed by domestic law. For example, tax administrations could consider evaluating the results of the transfer pricing methodology specified by the APA over the period of the APA, rather than on an annual basis, i.e. a “term test”. This approach would aggregate the financial results of FY2020, which may be exceptional, with the more normal results of prior and future years. In combination with this, tax administrations could also consider extending the period covered by an APA. Tax administrations could consider segregating the terms of the APA between financial years affected and unaffected by COVID-19, or cancelling an existing APA for FY2020 and then renewing the APA in a future period, potentially on revised terms. Alternatively, tax administration could also consider aggregating the financial results from a series of covered transactions covered separately under an APA and assessing whether on aggregate they deliver an outcome consistent with the terms of the APA ...

In some circumstances, it may be possible to retain some of the terms set out in an APA, but revise specific provisions for which the breach in the critical assumptions is relevant. For example, an APA may cover a series of controlled transactions for which the agreed methodology for only one specific transaction required revision ...

Revision would be the appropriate response where there has been a material change in conditions noted in a critical assumption in the APA and the tax administration and the taxpayer agree on how to revise the APA.51 The revision of an existing APA would have the effect of changing the previously agreed terms of an APA. Under this approach, it is likely that the original terms of the APA would remain in force for the period up to FY2020, with revised terms applying for FY2020 and any subsequent year(s) subject to the economic circumstances derived from the COVID-19 pandemic. 51 Paragraphs 83 and 85 of Annex II to Chapter IV of the OECD TPG ...

In some situations, the APA agreement, domestic law or procedural provisions may prescribe procedures to follow, or describe the consequences that will arise, in situations where there is a failure to fulfil critical In these situations, tax administrations should follow the prescribed procedures.46 In other situations, tax administrations may have some discretion over their response.47 Also in the event that the effect of the breach is not material, (Paragraph 75 of the Annex II to Chapter IV of the OECD TPG), the taxpayer and tax administration may agree to continue to apply the APA In the case of bilateral or multilateral APAs, a common and helpful practice is for the tax administrations to consult before imposing any unilateral changes,48 and such consultation is mandated in some APAs.49 In the absence of other rules and procedures prescribed by domestic law, when the guidance in Chapter IV of the OECD TPG apply , a breach of critical assumption with the APA could have three potential outcomes as provided in section E.3 Annex II to Chapter IV of OECD TPG:50 Revision, which means that the taxpayer and tax administrations still have the benefit of the APA for the whole of the proposed period, albeit that different terms apply before and after the revision date. Cancellation, which means the APA is treated as being effective and in force but only up to the cancellation date and not for the whole of the proposed period. Revocation, which has the effect that the taxpayer is treated as if the APA had never been entered into. 46 Paragraph 74 of Annex II to Chapter IV of the OECD TPG. 47Paragraph 66 of Annex II to Chapter IV of the OECD TPG, item e) (breach of critical assumption would “trigger renegotiation of the agreement”). 48 Paragraph 75 of Annex II to Chapter IV of the OECD TPG (considering what “the tax administrations determine”). 49 Paragraph 66 of Annex II to Chapter IV of the OECD TPG, item e) (breach of critical assumption would “trigger renegotiation of the agreement”). 50 Paragraph 76 of Annex II to Chapter IV of the OECD TPG ...

When considering the consequences of the failure to meet critical assumptions, tax administrations and taxpayers should consider the (i) terms of the APA; (ii) any agreement between relevant tax administrations as to how to deal with the failure; and (iii) any applicable domestic law or procedural provisions.45 This section follows the guidance in Chapter IV, Section F and Annex II to Chapter IV of the OECD TPG. 45 Paragraph 74 of Annex II to Chapter IV of the OECD TPG ...

Where tax administrations establish that the critical assumptions of an APA have not been breached, the existing APA, as agreed, must continue to be respected, maintained and upheld. If a taxpayer believes that the terms of the APA are no longer appropriate, it should not seek unilaterally to breach critical assumptions deliberately or fail to comply with the terms or conditions of the APA, and it should avoid making unreliable price adjustments or taking other actions that are not consistent with (or otherwise fail to comply with) the terms of the APA that it may view as not appropriate. Instead, where taxpayers have concerns, they should approach the relevant tax administration in a transparent way to discuss their concerns ...

Whether there has been a breach in a critical assumption should be analysed on a case-by-case basis, and it should take into account the individual circumstances of the taxpayer and commercial environment. The COVID-19 pandemic has not had the same impact on all enterprises. While many industries and business have experienced a drop in demand and revenues because of forced lockdowns, others have expanded their consumer-base or benefitted from new business opportunities. Whether a breach has occurred may also depend on the duration of the disruption. If a breach has occurred, in determining an appropriate response, a tax administration should carefully consider the extent of the divergence between the agreed parameters in the APA and the new parameters under the COVID-19 economic circumstances43; and, the ability of the agreed transfer pricing methodology to reliably reflect arm’s length pricing of a controlled transaction under the new situation.44 43 Paragraph 45 of Annex II to Chapter IV of the OECD TPG. 44 Paragraph 43 of Annex II to Chapter IV of the OECD TPG ...

Most APAs include critical assumptions about the operational and economic conditions that will affect the transactions covered by the APA. The COVID-19 pandemic and the response of governments have dramatically affected the economic and market conditions and are likely to qualify as a breach of the critical assumptions (para. 44 b) and c) of Annex II to Chapter IV of the OECD TPG). A mere change in business results during the period affected by the COVID-19 pandemic would not, however, result in a breach of a critical assumption (unless the particular APA had a critical assumption regarding changes in business results) ...

Generally, the APA itself will explicitly describe what constitutes a situation of non-compliance or failure to meet a critical assumption, as well as the consequences arising from it. Also, domestic law or procedural provisions may also impose consequences or obligations on the taxpayer and affected tax administrations. All this should be considered by taxpayers and tax administrations in determining the impact of the COVID-19 pandemic on existing APAs ...

Yes, existing APAs and their terms should be respected, maintained and upheld, unless a condition leading to the cancellation or revision of the APA (e.g. breach of critical assumptions) has occurred. Taxpayers and tax administrations cannot automatically disregard or alter the terms of existing APAs due to the change in economic circumstances. 42 In considering how to respond to the impact of COVID-19 on existing APAs, the guidance provided, in Annex II to Chapter IV of the OECD TPG: Guidelines for Conducting Advance Pricing Arrangements under the Mutual Agreement Procedure (MAP APAs) is relevant ...

Some taxpayers may face challenges applying existing APAs under the economic conditions resulting from the COVID-19 pandemic. In those instances, taxpayers are encouraged to adopt a collaborative and transparent approach by raising these issues with the relevant tax administrations in a timely manner. Taxpayers should not seek to resolve them unilaterally without consulting with the relevant tax administrations ...

One of the primary benefits of an APA is that it provides tax certainty to taxpayers and tax administrations by ensuring predictability in the treatment of international transactions for tax purposes. It is important to underline, however, that taxpayers and tax authorities are encouraged to take constructive and collaborative approaches in the APA process, which are conducive to the long-run success of an APA programme ...

COVID-19 has led to material changes in economic conditions that were not anticipated when many APAs covering FY2020 and potentially future financial years affected by COVID-19 were agreed. Given this situation, it is important to determine to what extent, if any, the change in economic conditions affects the application of existing APAs. Taxpayers and tax administrations negotiating APAs that apply to FY2020 may also face questions about how the economic conditions arising from COVID-19 should be taken into account. For this reason, this guidance explains the possible impact of COVID-19 on existing unilateral, bilateral and multilateral APAs and APAs under negotiation ...

However, the unique and almost unprecedented economic conditions arising from and government responses to COVID-19 have led to practical challenges for the application of the arm’s length principle. For example, the pandemic may raise novel issues or exacerbate in complexity or magnitude the occurrence of certain transfer pricing issues (e.g. effect of government assistance or the availability of reliable comparable data). For taxpayers applying transfer pricing rules for the financial years impacted by the COVID-19 pandemic and for tax administrations that will be evaluating this application, there is a need to address these practical questions. Based on the responses to the questionnaires submitted to members of the Inclusive Framework and businesses, and conscious of the need to provide practical and timely guidance, this note addresses four priority issues: (i) comparability analysis; (ii) allocation of losses and the allocation of COVID-19 specific costs; (iii) government assistance programmes; and (iv) Advance Pricing Arrangements (“APAs”). For ease of presentation, these issues have been presented as discrete topics, but it is important to emphasise that in performing a transfer pricing analysis, these topics may be interrelated and therefore should be considered together and within the analytical framework of the OECD TPG. For example, in order to determine whether an entity should be allocated losses during the pandemic under arm’s length conditions, the guidance in Chapter II of this document is relevant, but the guidance in Chapter I (as it relates to the results of the comparability analysis) and the guidance in Chapter III (if it receives government assistance) is also relevant ...

On 23 September 2020, the Federal Administrative Court in Mexico issued a not yet published decision in a dispute between the Mexican tax authorities (SAT) and Canadian mining group First Majestic Silver Corp’s Mexican subsidiary, Primero Empresa Minera. The court case was filed back in 2015 by the tax authorities, to cancel an Advance Pricing Agreement (APA) issued to Primero Empresa Minera back in 2012. According to the APA, a methodology had been determined allowing the Mexican mining company to sell silver at 4.04 dollars per ounce to a group company based in Barbados (Silver Trading Barbados Ltd) via Luxembourg, when the average market price of silver was above 30 dollars. The APA was applied by Primero Empresa Minera for FY 2010 – 2014. The Federal Court decided in favor of the tax authorities that the APA was invalid and therefore nullified. After receiving the decision from the Federal Court, First Majestic on 25 September 2020 issued a press release stating that “the Federal Court’s decision was not arrived following regular procedures, was undertaken hastily, and did not provide opportunity for the presentation of evidence from PEM. In addition, the decision is inconsistent with previous legal precedents and violates the Federal Mexican Constitution. The Company continues to assess all of its legal options, both domestic and international including under the North American Free Trade Agreement, and will make additional updates, when necessary, on its legal plan of action.“ In a later press release dated 11 November 2020 it was announced that First Majestic intended to appeal the decision to the Circuit Court prior to the December 1, 2020 deadline. Prior to receiving the court’s decision, First Majestic had stated that, SAT illegally chose to ignore the legal existence of an advance pricing agreement and that to address the  unjustified conduct of the authorities the group would issue a notice of intent to submit a claim (notice) under the provisions of Chapter 11 of NAFTA trade agreement. This notice of intent was published in may 2020 . According to the notice, the amount of compensation to be claimed in the arbitration proceedings has been estimated by a minimum amount of $500 million, in addition to any applicable interest, costs and expenses of the arbitration proceedings. In a later press release from 10 March, First Majestic elaborates further on the case and background ...

Eaton Corporation is a global manufacturer of electrical and industrial products headquartered in the US.  This case concerning the computation of penalties is related to a previous 2017 dispute concerning the cancellation of two advance pricing agreements (APAs) establishing a transfer pricing methodology (TPM) for covered transactions between Eaton Corp and its subsidiaries. In 2011 IRS determined that Eaton had not complied with the applicable terms of the governing APA revenue procedures and canceled APA I and APA II, effective January 1, 2005 and 2006, respectively. The US Tax Court found that the cancellation of the APAs was an abuse of discretion (US vs Eaton TC opinion from July 2017), and the APAs remained in effect. Irespective of the ruling related to the cancellation of the APAs, the IRS determined that a section 482 adjustment were still necessary to reflect an arm’s-length result for Eaton’s intercompany transactions, and that the computations should include 40% penalties pursuant to I.R.C. sec. 6662(h). Section 6662(a) imposes a 20% penalty on an underpayment of tax attributable to any of the reasons listed in section 6662(b). These include “[a]ny substantial valuation misstatement under chapter 1”. Sec. 6662(b)(3). As relevant to this case, a “substantial valuation misstatement” occurs when the net section 482 transfer price adjustment for the taxable year exceeds the lesser of $5 million or 10% of the taxpayer’s gross receipts. When the net section 482 transfer price adjustment for the taxable year exceeds the lesser of $20 million or 20% of the taxpayer’s gross receipts, section 6662(h) increases the penalty to 40 percent of the underpayment. Eaton held that there were no adjustments pursuant to I.R.C. sec. 482 as the APAs were still in effect and therefore the computation of additional taxes from the transfer pricing adjustment should not include penalties. The Tax Court held in favor of Eaton. Since the APAs remained in effect, there are no allocation of income and deductions pursuant to section 482 and no “net increase in taxable income for the taxable year * * * resulting from adjustments under section 482 in the price for any property or services”. Accordingly, Eaton is not liable for section 6662(h) penalties for the years in issue. US-vs-Eaton-USTC-Oct-2019 ...

The tax authority had set the price range for “APA Ktf’s” request for an advance pricing arrangement (APA) at 12.50 to 22.50 basis points. According to the tax authorities, it follows from points 3.61 and 3.62 of the Guidelines that it is only appropriate to adjust the arm’s length price for such transactions to a level close to the mid-point of the range if there is a comparability gap. In the present case, however, it had not been established that there are any shortcomings in comparability, so the first turn of paragraph 3.62 applies: any point in the range, including the mid-point, is in accordance with the arm’s length principle. Judgement of the Court of Appeal. The Court of Appeal pointed out that the applicant had applied for the determination of the normal market price under Article 132/B of the Art. “[37]Defendant [tax authorities] argued in its application for review that, under paragraphs 3.61 and 3.62 of the Guidelines, it is only appropriate to adjust the arm’s length price for such transactions to a level close to the mid-point of the range if there are comparability gaps. In the present case, however, the defendant has not established that there are any shortcomings in comparability, so the first turn of point 3.61 applies: any point in the range, including the mid-point, is in line with the arm’s length principle. In other respects, the defendant argues that, even if there are no shortcomings in comparability, only the extreme values of the range can be used, and not other values, such as the mean value: this cannot be combined with the interpretative criteria required by Article 28 of the Fundamental Law. [38] In its application for review, the defendant also argued that the principle of the proper exercise of rights under Article 1(2) of the Tao Law must be taken into account when applying Article 18(1) of the Tao Law. However, no breach of that fundamental principle of the Tao Law was found in the decision of the defendant which was the subject of the judicial review, nor is it found in the upheld decision of the first instance. Page 37, paragraph 3 of the first instance decision states in general terms, without mentioning the place of the legislation, that “The tax authority’s … transfer pricing adjustment up to the nearest point of the band is not based on Article 97(6) of the Tax Code, but on the relevant provisions of the Tao. In the absence of a specific provision of authority to that effect, the court of first instance could not rule on the matter by a final judgment and, consequently, it cannot be the subject of a review procedure. In the absence of a final judgment, the Curia also failed to analyse the question, following the applicant’s counterclaim, whether transfer pricing can be regarded as a rule or tax advantage (tax exemption, tax reduction) affecting the tax liability or tax liability affected by Section 1(2) of the Tao.tv. [39] In addition to the facts of the case, the applicant was required to determine the value according to which the condition of the controlled transaction had to be corrected, pursuant to Article 18(1) of the Tao.tv. In the absence of a provision in the Tao.tv., the method of correction was, by virtue of § 31(2)(b) of the Tao.tv., the first turn of point 3.62 of the Guidelines: any point within the range corresponds to the arm’s length price. On the basis of the actual content of Article 18(1) of the Tao Law, the Court of First Instance correctly concluded that neither the APA Decision, nor the Guidelines, nor the Tao Law, implied that, in the case of several normal market prices that can be designated in a given range, the adjustment for a consideration applied outside that range can only be made to the nearest extreme value. [40] In the light of the above, the Curia upheld the judgment of the court of first instance on the basis of Paragraph 275(3) of the Hungarian Civil Code. Content of the decision in principle [41] In the case of an arm’s length price set in a decision fixing the arm’s length price (advance pricing arrangement), the consideration applied outside the arm’s length range may be adjusted not only to the nearest extreme value but also to any element of the range, in accordance with Section 18(1) of the Tao.tv.” Click here for English translation Click here for other translation 35-504 ...

R. Sp. z o.o. had requested a binding ruling/interpretation regarding tax deduction for the price paid to a related entity under restructuring. The request was denied by the tax authorities, as the question – according to the authorities – could only be answered under an Advance Pricing Agreement. R. Sp. z.o.o brought the issue before the Administrative Court Judgement of the Administrative Court The Court decided in favour of R. Sp. z.o.o. According to the Court, the tax authorities could not refuse to issue a binding ruling/interpretation on whether or not a price paid to a related party under restructuring was tax deductible. Click here for English Translation Click here for other translation III SA_Wa 263_18 - Wyrok WSA w Warszawie z 2018-09-26 ...

ZERAIM IBERICA SA, a Spanish subsidiary in the Swiss Syngenta Group (that produces seeds and agrochemicals), had first been issued a tax assessment relating to fiscal years 2006 and 2007 and later another assessment for FY 2008 and 2009 related to the arm’s length price of seeds acquired from Zeraim Gedera (Israel) and thus the profitability of the distribution activities in Spain. The company held that new evidence – an advance pricing agreement (APA) between France and Switzerland – demonstrated that the comparability analysis carried out by the Spanish tax authorities suffered from significant deficiencies and resulted in at totally irrational result, intending to allocate a net operating result or net margin of 32.79% in fiscal year 2008 and 30.81% in 2009 to ZERAIM IBERICA SA when the profitability of distribution companies in the sector had average net margins of 1.59%. The tax authorities on there side argued that the best method for pricing the transactions was the Resale Price Method and further argued that the companies in the benchmark study provided by the taxpayer were not comparable. The authorities also pointed to the fact that ZERAIM IBERICA SA prior to entering the distribution agreement had a gross margin of around 40%, and now after entering the agreement would have a net margin of only 1.5%. The Court held in favor of the tax authorities due to (1) lack of explanation to the shift in profitability of ZERAIM IBERICA SA before and after entering the distribution agreement and (2) lack in comparability between the companies selected for the benchmark study and the Spanish distributor and (3) the transactional net margin method presented by the taxpayer in accordance with Spanish regulations is subordinated to the direct methods (resale price minus etc.). Click here for English translation Click here for other translation Spain vs Zeraim SAN_2856_2018 ...

3. Dispute prevention and resolution in relation to the HTVI approach 34. The purpose of this guidance is to improve consistency in the application of the HTVI approach by jurisdictions, thus reducing the risk of economic double taxation. In addition to this guidance, there may be other tools at the disposal of taxpayers to avoid instances of double taxation and enhance tax certainty in HTVI transactions. 35. In particular, Chapter IV of these Guidelines discusses in detail advance pricing arrangements (APAs), which if concluded bilaterally or multilaterally between treaty partner competent authorities provide an increased level of certainty in the jurisdictions involved, lessen the likelihood of double taxation, and may proactively prevent transfer pricing disputes. Recognising the role of APAs in preventing double taxation and providing certainty to taxpayers, paragraph 6.193 of these Guidelines prevents the application of the HTVI approach when the transfer of the HTVI is covered by a bilateral or multilateral APA in effect for the period in questions between the jurisdictions of the transferee and the transferor. 36. In this regard, the Final BEPS Report for Action 14 “Making Dispute Resolution Mechanisms More Effective” (BEPS Report on Action 14) recommends as a best practice the implementation of bilateral APAs, as soon as a jurisdiction has the capacity to do so (Best Practice no. 4). Furthermore, one of the elements of the BEPS Report on Action 14 is that countries with bilateral APA programmes provide for the rollback of APAs in appropriate cases, subject to the applicable time limits where the relevant facts and circumstances in the earlier tax years are the same and subject to the verification of these facts and circumstances on audit. 37. In the event that the application of the approach to HTVI leads to double taxation, the guidance in paragraph 6.195 states that it would be important to permit resolution of such cases through access to the mutual agreement procedure under the applicable treaty. Accordingly, this guidance should be read in conjunction with Article 25 and its Commentary and the commitment made in the Final BEPS Report on Action 14. That Report describes the minimum standard on dispute resolution to which the OECD and G20 countries have committed, which consists of specific measures to remove obstacles to an effective and efficient mutual agreement procedure. 38. In the context of the HTVI approach it is especially relevant that under Article 25 the mutual agreement procedure “can be set in motion by the taxpayer without waiting until the taxation considered by him to be not in accordance with the Convention has been charged against or notified to him. To be able to set the procedure in motion, he must, and it is sufficient if he does, establish that the actions of one or both of the Contracting States will result in such taxation, and that this taxation appears as a risk which is not merely possible but probable” (see paragraph 14 of the Commentary to Article 25 of the Model Tax Convention). This possibility under the applicable tax treaty may alleviate some of the concerns arising in relation to timing issues and reduce the instances of unresolved double taxation. 39. Finally, one of the best practices recommended in the BEPS Report on Action 14 and that is relevant for HTVI transactions is that, subject to the requirements of paragraph 1 of Article 25, countries implement appropriate procedures to permit, in certain cases and after an initial tax assessment, taxpayer requests for the multiyear resolution through the MAP of recurring issues with respect to filed tax years, where the relevant facts and circumstances are the same and subject to the verification of such facts and circumstances on audit ...

The IRS decided to cancel two advance pricing agreements (APAs) with Eaton Corporation. The US Tax Court ruled that this decision was an abuse of discretion. US vs EATON CORPORATION AND SUBSIDIARIES, July 26 2017, United States Tax Court, TC memo 2017-147 ...

In addition, bilateral APAs with treaty partners should conform to certain requirements. For example, the same necessary and pertinent information should be made available to each tax administration at the same time, and the agreed upon methodology should be in accordance with the arm’s length principle ...

Between those countries that use APAs, greater uniformity in APA practices could be beneficial to both tax administrations and taxpayers. Accordingly, the tax administrations of such countries may wish to consider working agreements with the competent authorities for the undertaking of APAs. These agreements may set forth general guidelines and understandings for the reaching of mutual agreement in cases where a taxpayer has requested an APA involving transfer pricing issues ...

As discussed above, the nature of APA proceedings may de facto limit their accessibility to large taxpayers. The restriction of APAs to large taxpayers may raise questions of equality and uniformity, since taxpayers in identical situations should not be treated differently. A flexible allocation of examination resources may alleviate these concerns. Tax administrations also may need to consider the possibility of adopting a streamlined access for small taxpayers. Tax administrations should take care to adapt their levels of inquiry, in evaluating APAs, to the size of the international transactions involved ...

Wherever possible, an APA should be concluded on a bilateral or multilateral basis between competent authorities through the mutual agreement procedure of the relevant treaty. A bilateral APA carries less risk of taxpayers feeling compelled to enter into an APA or to accept a non- arm’s-length agreement in order to avoid expensive and prolonged enquiries and possible penalties. A bilateral APA also significantly reduces the chance of any profits either escaping tax altogether or being doubly taxed, Moreover, concluding an APA through the mutual agreement procedure may be the only form that can be adopted by a tax administration which lacks domestic legislation to conclude binding agreements directly with the taxpayer ...

When considering the scope of an APA, taxpayers and tax administrations need to pay close attention to the reliability of any predictions so as to exclude unreliable predictions. In general, great care must be taken if the APA goes beyond the methodology, its application, and critical assumptions. See paragraphs 4.134-4.139 ...

There are some continuing issues regarding the form and scope of APAs that require greater experience for full resolution and agreement among member countries, such as the question of unilateral APAs. The Committee on Fiscal Affairs intends to monitor carefully any expanded use of APAs and to promote greater consistency in practice among those countries that choose to use them ...

Since the Guidelines were published in their original version in 1995, a significant number of OECD member countries have acquired experience with APAs. Those countries which do have some experience seem to be satisfied so far, so that it can be expected that under the appropriate circumstances the experience with APAs will continue to expand. The success of APA programs will depend on the care taken in determining the proper degree of specificity for the arrangement based on critical assumptions, the proper administration of the program, and the presence of adequate safeguards to avoid the pitfalls described above, in addition to the flexibility and openness with which all parties approach the process ...

An APA program cannot be used by all taxpayers because the procedure can be expensive and time-consuming and small taxpayers generally may not be able to afford it. This is especially true if independent experts are involved. APAs may therefore only assist in resolving mainly large transfer pricing cases. In addition, the resource implications of an APA program may limit the number of requests a tax administration can entertain. In evaluating APAs, tax administrations can alleviate these potential problems by ensuring that the level of inquiry is adjusted to the size of the international transactions involved ...

Tax administrations also should ensure the confidentiality of trade secrets and other sensitive information and documentation submitted to them in the course of an APA proceeding. Therefore, domestic rules against disclosure should be applied. In a bilateral APA the confidentiality requirements on treaty partners would apply, thereby preventing public disclosure of confidential data ...

Problems could also develop if tax administrations misuse information obtained in an APA in their examination practices. If the taxpayer withdraws from its APA request or if the taxpayer’s application is rejected after consideration of all of the facts, any nonfactual information provided by the taxpayer in connection with the APA request, such as settlement offers, reasoning, opinions, and judgments, cannot be treated as relevant in any respect to the examination. In addition, the fact that a taxpayer has applied unsuccessfully for an APA should not be taken into account by the tax administration in determining whether to commence an examination of that taxpayer ...

Another possible concern is that an APA may allow the tax administration to make a closer study of the transactions at issue than would occur in the context of a transfer pricing examination, depending on the facts and circumstances. The taxpayer must provide detailed information relating to its transfer pricing and satisfy any other requirements imposed for the verification of compliance with the terms and conditions of the APA. At the same time, the taxpayer is not sheltered from normal and routine examinations by the tax administration on other issues. An APA also does not shelter a taxpayer from examination of its transfer pricing activities. The taxpayer may still have to establish that it has complied in good faith with the terms and conditions of the APA, that the material representations in the APA remain valid, that the supporting data used in applying the methodology were correct, that the critical assumptions underlying the APA are still valid and are applied consistently, and that the methodology is applied consistently. Tax administrations should, therefore, seek to ensure that APA procedures are not unnecessarily cumbersome and that they do not make more demand of taxpayers than are strictly required by the scope of the APA application ...

For example, an APA might seek more detailed industry and taxpayer specific information than would be requested in a transfer pricing examination. In principle, this should not be the case and the documentation required for an APA should not be more onerous than for an examination, except for the fact that in an APA the tax administration will need to have details of predictions and the basis for those predictions, which may not be central issues in a transfer pricing examination that focuses on completed transactions. In fact, an APA should seek to limit the documentation, as discussed above, and focus the documentation more closely on the issues in light of the taxpayer’s business practices. Tax administrations need to recognise that: a) Publicly available information on competitors and comparables is limited; b) Not all taxpayers have the capacity to undertake in-depth market analyses; and, c) Only parent companies may be knowledgeable about group pricing policies ...

In addition to the foregoing concerns, there are a number of possible pitfalls as described below that could arise if an APA program were improperly administered, and tax administrations who use APAs should make strong efforts to eliminate the occurrence of these problems as APA practice evolves ...

Concerns have also been expressed that, because of the nature of the APA procedure, it will interest taxpayers with a good voluntary compliance history. Experience in some countries has shown that, most often, taxpayers which would be interested in APAs are very large corporations which would be audited on a regular basis, with their pricing methodology then being examined in any event. The difference in the examination conducted of their transfer pricing would be one of timing rather than extent. As well, it has not been demonstrated that APAs will be of interest solely or principally to such taxpayers. Indeed, there are some early indications that taxpayers, having experienced difficulty with tax administrations on transfer pricing issues and not wishing these difficulties to continue, are often interested in applying for an APA. There is then a serious danger of audit resources and expertise being diverted to these taxpayers and away from the investigation of less compliant taxpayers, where these resources could be better deployed in reducing the risk of losing tax revenue. The balance of compliance resources may be particularly difficult to achieve since an APA programme tends to require highly experienced and often specialised staff. Requests for APAs may be concentrated in particular areas or sectors, e.g. global trading, and this can overstretch the specialist resources already allocated to those areas by the authorities. Tax administrations require time to train experts in specialist fields in order to meet unforeseeable demands from taxpayers for APAs in those areas ...

Another potential disadvantage could occur where one tax administration has undertaken a number of bilateral APAs which involve only certain of the associated enterprises within an MNE group. A tendency may exist to harmonise the basis for concluding later APAs in a way similar to those previously concluded without sufficient regard being had to the conditions operating in other markets. Care should therefore be taken with interpreting the results of previously concluded APAs as being representative across all markets ...

An APA program may initially place a strain on transfer pricing audit resources, as tax administrations will generally have to divert resources earmarked for other purposes (e.g. examination, advising, litigation, etc.) to the APA programme. Demands may be made on the resources of a tax administration by taxpayers seeking the earliest possible conclusion to an APA request, keeping in mind their business objectives and time scales, and the APA programme as a whole will tend to be led by the demands of the business community. These demands may not coincide with the resource planning of the tax administrations, thereby making it difficult to process efficiently both the APAs and other equally important work. Renewing an APA, however, is likely to be less time-consuming than the process of initiating an APA. The renewal process may focus on updating and adjusting facts, business and economic criteria, and computations. In the case of bilateral arrangements, the agreement of the competent authorities of both Contracting States is to be obtained on the renewal of an APA to avoid double taxation (or non-taxation) ...

Another possible disadvantage would arise if an APA involved an unreliable prediction on changing market conditions without adequate critical assumptions, as discussed above. To avoid the risk of double taxation, it is necessary for an APA program to remain flexible, because a static APA may not satisfactorily reflect arm’s length conditions ...

Another problem with a unilateral APA is the issue of corresponding adjustments. The flexibility of an APA may lead the taxpayer and the associated party to accommodate their pricing to the range of permissible pricing in the APA. In a unilateral APA, it is critical that this flexibility preserve the arm’s length principle since a foreign competent authority is not likely to allow a corresponding adjustment arising out of an APA that is inconsistent, in its view, with the arm’s length principle ...

Unilateral APAs may present significant problems for tax administrations and taxpayers alike. From the point of view of other tax administrations, problems arise because they may disagree with the APA’s conclusions. From the point of view of the associated enterprises involved, one problem is the possible effect on the behaviour of the associated enterprises. Unlike bilateral or multilateral APAs, the use of unilateral APAs may not lead to an increased level of certainty for the taxpayer involved and a reduction in economic or juridical double taxation for the MNE group. If the taxpayer accepts an arrangement that over-allocates income to the country making the APA in order to avoid lengthy and expensive transfer pricing enquiries or excessive penalties, the administrative burden shifts from the country providing the APA to other tax jurisdictions. Taxpayers should not feel compelled to enter into APAs for these reasons ...

The disclosure and information aspects of an APA programme as well as the cooperative attitude under which an APA can be negotiated may assist tax administrations in gaining insight into complex international transactions undertaken by MNEs. An APA programme can improve knowledge and understanding of highly technical and factual circumstances in areas such as global trading and the tax issues involved. The development of specialist skills that focus on particular industries or specific types of transactions will enable tax administrations to give better service to other taxpayers in similar circumstances. Through an APA programme tax administrations have access to useful industry data and analysis of pricing methodologies in a cooperative environment ...

Bilateral and multilateral APAs substantially reduce or eliminate the possibility of juridical or economic double or non taxation since all the relevant countries participate. By contrast, unilateral APAs do not provide certainty in the reduction of double taxation because tax administrations affected by the transactions covered by the APA may consider that the methodology adopted does not give a result consistent with the arm’s length principle. In addition, bilateral and multilateral APAs can enhance the mutual agreement procedure by significantly reducing the time needed to reach an agreement since competent authorities are dealing with current data as opposed to prior year data that may be difficult and time-consuming to produce ...

An APA may prevent costly and time-consuming examinations and litigation of major transfer pricing issues for taxpayers and tax administrations. Once an APA has been agreed, less resources may be needed for subsequent examination of the taxpayer’s return, because more information is known about the taxpayer. It may still be difficult, however, to monitor the application of the arrangement. The APA process itself may also present time savings for both taxpayers and tax administrations over the time that would be spent in a conventional examination, although in the aggregate there may be no net time savings, for example, in jurisdictions that do not have an audit procedure and where the existence of an APA may not directly affect the amount of resources devoted to compliance ...

APAs can provide an opportunity for both tax administrations and taxpayers to consult and cooperate in a non-adversarial spirit and environment. The opportunity to discuss complex tax issues in a less confrontational atmosphere than in a transfer pricing examination can stimulate a free flow of information among all parties involved for the purpose of coming to a legally correct and practicably workable result. The non-adversarial environment may also result in a more objective review of the submitted data and information than may occur in a more adversarial context (e.g. litigation). The close consultation and cooperation required between the tax administrations in an APA program also leads to closer relations with treaty partners on transfer pricing issues ...

An APA programme can assist taxpayers by eliminating uncertainty through enhancing the predictability of tax treatment in international transactions. Provided the critical assumptions are met, an APA can provide the taxpayers involved with certainty in the tax treatment of the transfer pricing issues covered by the APA for a specified period of time. In some cases, an APA may also provide an option to extend the period of time to which it applies. When the term of an APA expires, the opportunity may also exist for the relevant tax administrations and taxpayers to renegotiate the APA. Because of the certainty provided by an APA, a taxpayer may be in a better position to predict its tax liabilities, thereby providing a tax environment that is favourable for investment ...

Some countries lack the basis in their domestic law to enter into APAs. However, when a tax convention contains a clause regarding the mutual agreement procedure similar to Article 25 of the OECD Model Tax Convention, the competent authorities generally should be allowed to conclude an APA, if transfer pricing issues were otherwise likely to result in double taxation, or would raise difficulties or doubts as to the interpretation or application of the Convention. Such an arrangement would be legally binding for both States and would create rights for the taxpayers involved. Inasmuch as double tax treaties take precedence over domestic law, the lack of a basis in domestic law to enter into APAs would not prevent application of APAs on the basis of a mutual agreement procedure ...

Tax administrations might additionally rely on general domestic authority to administer taxes as the authority for entering into APAs. In some countries tax administrations may be able to issue specific administrative or procedural guidelines to taxpayers describing the appropriate tax treatment of transactions and the appropriate pricing methodology. As mentioned above, the tax codes of some OECD member countries include provisions that allow taxpayers to obtain specific rulings for different purposes. Even though these rulings were not designed specifically to cover APAs, they may be broad enough to be used to include APAs ...

APAs involving the competent authority of a treaty partner should be considered within the scope of the mutual agreement procedure under Article 25 of the OECD Model Tax Convention, even though such arrangements are not expressly mentioned there. Paragraph 3 of that Article provides that the competent authorities shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. Although paragraph 50 of the Commentary indicates that the matters covered by this paragraph are difficulties of a general nature concerning a category of taxpayers, it specifically acknowledges that the issues may arise in connection with an individual case. In a number of cases, APAs arise from cases where the application of transfer pricing to a particular category of taxpayer gives rise to doubts and difficulties. Paragraph 3 of Article 25 also indicates that the competent authorities may consult together for the elimination of double taxation in cases not provided for in the Convention. Bilateral APAs should fall within this provision because they have as one of their objectives the avoidance of double taxation. Even though the Convention provides for transfer pricing adjustments, it specifies no particular methodologies or procedures other than the arm’s length principle as set out in Article 9. Thus, it could be considered that APAs are authorised by paragraph 3 of Article 25 because the specific transfer pricing cases subject to an APA are not otherwise provided for in the Convention. The exchange of information provision in Article 26 also could facilitate APAs, as it provides for cooperation between competent authorities in the form of exchanges of information ...

An APA should be subject to cancellation, even retroactively, in the case of fraud or misrepresentation of information during an APA negotiation, or when a taxpayer fails to comply with the terms and conditions of an APA. Where an APA is proposed to be cancelled or revoked, the tax administration proposing the action should notify the other tax administrations of its intention and of the reasons for such action ...

Each tax administration involved in the APA will naturally wish to monitor compliance with the APA by the taxpayers in its jurisdiction, and this is generally done in two ways. First, it may require a taxpayer that has entered into an APA to file annual reports demonstrating the extent of its compliance with the terms and conditions of the APA and that critical assumptions remain relevant. Second, the tax administration may continue to examine the taxpayer as part of the regular audit cycle but without re- evaluating the methodology. Instead, the tax administration may limit the examination of the transfer pricing to verifying the initial data relevant to the APA proposal and determining whether or not the taxpayer has complied with the terms and conditions of the APA. With regard to transfer pricing, a tax administration may also examine the reliability and accuracy of the representations in the APA and annual reports and the accuracy and consistency of how the particular methodology has been applied. All other issues not associated with the APA fall under regular audit jurisdiction ...

An APA may cover all of the transfer pricing issues of a taxpayer (as is preferred by some countries) or may provide a flexibility to the taxpayer to limit the APA request to specified affiliates and intercompany transactions. An APA would apply to prospective years and transactions and the actual term would depend on the industry, products or transactions involved. The associated enterprises may limit their request to specified prospective tax years. An APA can provide an opportunity to apply the agreed transfer pricing methodology to resolve similar transfer pricing issues in open prior years. However, this application would require the agreement of the tax administration, the taxpayer, and, where appropriate, the treaty partner. Element 2.7 of the Action 14 minimum standard states that countries with bilateral APA programmes should provide for the roll- back of APAs (to previous filed tax years not included within the original scope of the APA) in appropriate cases, subject to the applicable time limits (such as domestic law statutes of limitation for assessments) where the relevant facts and circumstances in the earlier tax years are the same and subject to the verification of these facts and circumstances on audit ...

At the conclusion of an APA process, the tax administrations should provide confirmation to the associated enterprises in their jurisdiction that no transfer pricing adjustment will be made as long as the taxpayer follows the terms of the arrangements. There should also be a provision in an APA (perhaps by reference to a range) that provides for possible revision or cancellation of the arrangement for future years when business operations change significantly, or when uncontrolled economic circumstances (e.g. significant changes in currency exchange rates) critically affect the reliability of the methodology in a manner that independent enterprises would consider significant for purposes of their transfer pricing ...

Typically, associated enterprises are allowed to participate in the process of obtaining an APA, by presenting the case to and negotiating with the tax administrations concerned, providing necessary information, and reaching agreement on the transfer pricing issues. From the associated enterprises’ perspective, this ability to participate may be seen as an advantage over the conventional mutual agreement procedure ...

The cooperation of the associated enterprises is vital to a successful APA negotiation. For example, the associated enterprises ordinarily would be expected to provide the tax administrations with the methodology that they consider most reasonable under the particular facts and circumstances. The associated enterprises also should submit documentation supporting the reasonableness of their proposal, which would include, for example, data relating to the industry, markets, and countries to be covered by the agreement. In addition, the associated enterprises may identify uncontrolled businesses that are comparable or similar to the associated enterprises’ businesses in terms of the economic activities performed and the transfer pricing conditions, e.g. economic costs and risks incurred, and perform a functional analysis as described in Chapter I of these Guidelines ...

APAs, including unilateral ones, differ in some ways from more traditional private rulings that some tax administrations issue to taxpayers. An APA generally deals with factual issues, whereas more traditional private rulings tend to be limited to addressing questions of a legal nature based on facts presented by a taxpayer. The facts underlying a private ruling request may not be questioned by the tax administration, whereas in an APA the facts are likely to be thoroughly analysed and investigated. In addition, an APA usually covers several transactions, several types of transactions on a continuing basis, or all of a taxpayer’s international transactions for a given period of time. In contrast, a private ruling request usually is binding only for a particular transaction ...

Tax administrations may find APAs particularly useful in profit allocation or income attribution issues arising in the context of global securities and commodity trading operations, and also in handling multilateral cost contribution arrangements. The concept of APAs also may be useful in resolving issues raised under Article 7 of the OECD Model Tax Convention relating to allocation problems, permanent establishments, and branch operations ...

Because of concerns over double taxation, most countries prefer bilateral or multilateral APAs (i.e. an arrangement in which two or more countries concur), and indeed some countries will not grant a unilateral APA (i.e. an arrangement between the taxpayer and one tax administration) to taxpayers in their jurisdiction. The bilateral (or multilateral) approach is far more likely to ensure that the arrangements will reduce the risk of double taxation, will be equitable to all tax administrations and taxpayers involved, and will provide greater certainty to the taxpayers concerned. It is also the case in some countries that domestic provisions do not permit the tax administrations to enter into binding agreements directly with the taxpayers, so that APAs can be concluded with the competent authority of a treaty partner only under the mutual agreement procedure. For purposes of the discussion in this section, an APA is not intended to include a unilateral arrangement except where specific reference to a unilateral APA is made ...

Some countries allow for unilateral arrangements where the tax administration and the taxpayer in its jurisdiction establish an arrangement without the involvement of other interested tax administrations. However, a unilateral APA may affect the tax liability of associated enterprises in other tax jurisdictions. Where unilateral APAs are permitted, the competent authorities of other interested jurisdictions should be informed about the procedure as early as possible to determine whether they are willing and able to consider a bilateral arrangement under the mutual agreement procedure. In any event, countries should not include in any unilateral APA they may conclude with a taxpayer a requirement that the taxpayer waive access to the mutual agreement procedure if a transfer pricing dispute arises, and if another country raises a transfer pricing adjustment with respect to a transaction or issue covered by the unilateral APA, the first country is encouraged to consider the appropriateness of a corresponding adjustment and not to view the unilateral APA as an irreversible settlement ...

In sum, the reliability of a prediction depends on the facts and circumstances of each actual case. Taxpayers and tax administrations need to pay close attention to the reliability of a prediction when considering the scope of an APA. Unreliable predictions should not be included in APAs. The appropriateness of a method and its application can usually be predicted, and the relevant critical assumptions made, with more reliability than future results (price or profit level) ...

In deciding how specific an APA can be in a particular case, tax administrations should recognise that predictions of absolute future profit experience seems least plausible. It may be possible to use profit ratios of independent enterprises as comparables, but these also are often volatile and hard to predict. Use of appropriate critical assumptions and use of ranges may enhance the reliability of predictions. Historical data in the industry in question can also be a guide ...

As another example, it would not be appropriate to specify a profit split formula between associated enterprises if it is expected that the allocation of functions between the enterprises will be unstable. It would, however, be possible to prescribe a profit split formula if the role of each enterprise were articulated in critical assumptions. In certain cases, it might even be possible to make a reasonable prediction on the appropriateness of an actual profit split ratio if enough assumptions were provided ...

The reliability of any prediction used in an APA depends both on the nature of the prediction and the critical assumptions on which the prediction is based. For example, it would not be reasonable to assert that the arm’s length short-term borrowing rate for a certain corporation on intra- group borrowings will remain at 6% during the entire coming three years. It would be more plausible to predict that the rate will be LIBOR plus a fixed percentage. The prediction would become even more reliable if an appropriate critical assumption were added regarding the company’s credit rating (e.g. the addition to LIBOR will change if the credit rating changes) ...

One key issue in the concept of APAs is how specific they can be in prescribing a taxpayer’s transfer pricing over a period of years, for example whether only the transfer pricing methodology or more particular results can be fixed in a particular case. In general, great care must be taken if the APA goes beyond the methodology, the way it will be applied, and the critical assumptions, because more specific conclusions rely on predictions about future events ...

An advance pricing arrangement (APA) is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time. An APA is formally initiated by a taxpayer and requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax administrations. APAs are intended to supplement the traditional administrative, judicial, and treaty mechanisms for resolving transfer pricing issues. They may be most useful when traditional mechanisms fail or are difficult to apply. Detailed guidelines for conducting advance pricing arrangements under the mutual agreement procedure (MAP APAs) were adopted in October 1999 and are found as an Annex to this chapter. The work pursuant to Action 14 of the BEPS Action Plan to ensure the timely, effective and efficient resolution of treaty-related disputes recommended, as non-binding best practice 4, that countries should implement bilateral APA programmes as soon as they have the capacity to do so, recognising that APAs provide a greater level of certainty in both treaty partner jurisdictions, lessen the likelihood of double taxation and may proactively prevent transfer pricing disputes. In this regard, it should be noted that the country mutual agreement procedure profiles prepared pursuant to element 2.2 of the Action 14 minimum standard include information on the bilateral APA programmes ...

Annex to Chapter IV: Guidelines for Conducting Advance Pricing Arrangements under the Mutual Agreement Procedure (“MAP APAs”) Background A.1 Introduction Advance Pricing Arrangements (“APAs”) are the subject of extensive discussion in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations at Chapter IV, Section F. The development of working arrangements between competent authorities is considered at paragraph 4.164: Between those countries that use APAs, greater uniformity in APA practices could be beneficial to both tax administrations and taxpayers. Accordingly, the tax administrations of such countries may wish to consider working agreements with the competent authorities for the undertaking of APAs. These agreements may set forth general guidelines and understandings for the reaching of mutual agreement in cases where a taxpayer has requested an APA involving transfer pricing issues. It should be noted that the use of the term “agreement” in the above quotation is not intended to give any status to such procedural arrangements above that provided for by the Mutual Agreement Article of the OECD Model Tax Convention. Additionally, the Committee on Fiscal Affairs stated at paragraph 4.160 of the Guidelines that it intended “to monitor carefully any expanded use of APAs and to promote greater consistency in practice amongst those countries that choose to use them.” This annex follows up on the above recommendations. The objective is to improve the consistency of application of APAs by providing guidance to tax administrations on how to conduct mutual agreement procedures involving APAs. Although the focus of the annex is on the role of tax administrations, the opportunity is taken to discuss how best the taxpayer can contribute to the process. This guidance is intended for use by those countries – both OECD members and non-members – that wish to use APAs. A.2 Definition of an APA Many jurisdictions have had, for some time, procedures (e.g. rulings) enabling the taxpayer to obtain some degree of certainty regarding how the law will be applied in a given set of circumstances. The legal consequences of the proposed action are determined in advance, based on assumptions about the factual basis. The validity of this determination is dependent upon the assumptions being supported by the facts when the actual transactions take place. The term APA refers to a procedural arrangement between a taxpayer or taxpayers and a tax administration intended to resolve potential transfer pricing disputes in advance. The APA differs from the classic ruling procedure, in that it requires the detailed review and to the extent appropriate, verification of the factual assumptions on which the determination of legal consequences is based, before any such determination can be made. Further, the APA provides for a continual monitoring of whether the factual assumptions remain valid throughout the course of the APA period. An APA is defined in the first sentence of paragraph 4.123 of the Guidelines as “an arrangement that determines, in advance (emphasis added) of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time.” It is also stated in paragraph 4.131 that “The concept of APAs also may be useful in resolving issues raised under Article 7 of the OECD Model Tax Convention relating to allocation problems, permanent establishments, and branch operations.” In the Guidelines (see paragraph 4.129) the arrangements solely between a taxpayer or taxpayers and a tax administration are referred to as “unilateral APAs”. The Guidelines encourage bilateral APAs and recommend at paragraph 4.162 that “Wherever possible, an APA should be concluded on a bilateral or multilateral basis between competent authorities through the mutual agreement procedure of the relevant treaty.” A bilateral APA is based on a single mutual agreement between the competent authorities of two tax administrations under the relevant treaty. A multilateral APA is a term used to describe a situation where there is more than one bilateral mutual agreement. Although, commonly an APA will cover cross-border transactions involving more than one taxpayer and legal enterprise, i.e. between members of a MNE group, it is also possible for an APA to apply to only one taxpayer and legal enterprise. For example, consider an enterprise in Country A that trades through branches in Countries B, C and D. In order to have certainty that double taxation will not occur, countries A, B, C and D will need to share a common understanding of the measure of profits to be attributed to each jurisdiction in respect of that trading activity under Article 7 of the OECD Model Tax Convention. This certainty could be achieved by the negotiation of a series of separate, but mutually consistent, bilateral mutual agreements, i.e. between A and B, A and C and A and D. The existence of multiple bilateral mutual agreements raises a number of special issues and these are discussed further in Section B, paragraphs 21-27 of this annex. It is important to distinguish the different types of APAs and so the bilateral or multilateral APAs, which are the main subject of this annex, are hereafter referred to as “MAP APAs”. The APAs that do not involve a mutual agreement negotiation are referred to as “unilateral APAs”. The generic term “APA” is used where the feature to be discussed applies to both types of APA. It should be noted that, in the vast majority of cases a bilateral APA will be concluded under the mutual agreement procedure of a double tax convention. However, in some cases where a bilateral APA has been sought and the treaty is not appropriate, or where a treaty is not applicable, the competent authorities of some countries may nevertheless conclude an arrangement using the executive power conferred on the heads of tax authorities. The term MAP APA should be interpreted, with the necessary adaptations, as including such exceptional agreements. The focus of this annex is on providing guidance to enable tax authorities to resolve disputes through the mutual agreement procedure, thereby helping to ...

In addition, bilateral APAs with treaty partners should conform to certain requirements. For example, the same necessary and pertinent information should be made available to each tax administration at the same time, and the agreed upon methodology should be in accordance with the arm’s length principle ...

Between those countries that use APAs, greater uniformity in APA practices could be beneficial to both tax administrations and taxpayers. Accordingly, the tax administrations of such countries may wish to consider working agreements with the competent authorities for the undertaking of APAs. These agreements may set forth general guidelines and understandings for the reaching of mutual agreement in cases where a taxpayer has requested an APA involving transfer pricing issues ...

As discussed above, the nature of APA proceedings may de facto limit their accessibility to large taxpayers. The restriction of APAs to large taxpayers may raise questions of equality and uniformity, since taxpayers in identical situations should not be treated differently. A flexible allocation of examination resources may alleviate these concerns. Tax administrations also may need to consider the possibility of adopting a streamlined access for small taxpayers. Tax administrations should take care to adapt their levels of inquiry, in evaluating APAs, to the size of the international transactions involved ...

Wherever possible, an APA should be concluded on a bilateral or multilateral basis between competent authorities through the mutual agreement procedure of the relevant treaty. A bilateral APA carries less risk of taxpayers feeling compelled to enter into an APA or to accept a non- arm’s-length agreement in order to avoid expensive and prolonged enquiries and possible penalties. A bilateral APA also significantly reduces the chance of any profits either escaping tax altogether or being doubly taxed, Moreover, concluding an APA through the mutual agreement procedure may be the only form that can be adopted by a tax administration which lacks domestic legislation to conclude binding agreements directly with the taxpayer ...

When considering the scope of an APA, taxpayers and tax administrations need to pay close attention to the reliability of any predictions so as to exclude unreliable predictions. In general, great care must be taken if the APA goes beyond the methodology, its application, and critical assumptions. See paragraphs 4.123-4.128 ...

There are some continuing issues regarding the form and scope of APAs that require greater experience for full resolution and agreement among member countries, such as the question of unilateral APAs. The Committee on Fiscal Affairs intends to monitor carefully any expanded use of APAs and to promote greater consistency in practice among those countries that choose to use them ...

Since the Guidelines were published in their original version in 1995, a significant number of OECD member countries have acquired experience with APAs. Those countries which do have some experience seem to be satisfied so far, so that it can be expected that under the appropriate circumstances the experience with APAs will continue to expand. The success of APA programs will depend on the care taken in determining the proper degree of specificity for the arrangement based on critical assumptions, the proper administration of the program, and the presence of adequate safeguards to avoid the pitfalls described above, in addition to the flexibility and openness with which all parties approach the process ...

An APA program cannot be used by all taxpayers because the procedure can be expensive and time-consuming and small taxpayers generally may not be able to afford it. This is especially true if independent experts are involved. APAs may therefore only assist in resolving mainly large transfer pricing cases. In addition, the resource implications of an APA program may limit the number of requests a tax administration can entertain. In evaluating APAs, tax administrations can alleviate these potential problems by ensuring that the level of inquiry is adjusted to the size of the international transactions involved ...

Tax administrations also should ensure the confidentiality of trade secrets and other sensitive information and documentation submitted to them in the course of an APA proceeding. Therefore, domestic rules against disclosure should be applied. In a bilateral APA the confidentiality requirements on treaty partners would apply, thereby preventing public disclosure of confidential data ...

Problems could also develop if tax administrations misuse information obtained in an APA in their examination practices. If the taxpayer withdraws from its APA request or if the taxpayer’s application is rejected after consideration of all of the facts, any nonfactual information provided by the taxpayer in connection with the APA request, such as settlement offers, reasoning, opinions, and judgments, cannot be treated as relevant in any respect to the examination. In addition, the fact that a taxpayer has applied unsuccessfully for an APA should not be taken into account by the tax administration in determining whether to commence an examination of that taxpayer ...

Another possible concern is that an APA may allow the tax administration to make a closer study of the transactions at issue than would occur in the context of a transfer pricing examination, depending on the facts and circumstances. The taxpayer must provide detailed information relating to its transfer pricing and satisfy any other requirements imposed for the verification of compliance with the terms and conditions of the APA. At the same time, the taxpayer is not sheltered from normal and routine examinations by the tax administration on other issues. An APA also does not shelter a taxpayer from examination of its transfer pricing activities. The taxpayer may still have to establish that it has complied in good faith with the terms and conditions of the APA, that the material representations in the APA remain valid, that the supporting data used in applying the methodology were correct, that the critical assumptions underlying the APA are still valid and are applied consistently, and that the methodology is applied consistently. Tax administrations should, therefore, seek to ensure that APA procedures are not unnecessarily cumbersome and that they do not make more demand of taxpayers than are strictly required by the scope of the APA application ...

“For example, an APA might seek more detailed industry and taxpayer specific information than would be requested in a transfer pricing examination. In principle, this should not be the case and the documentation required for an APA should not be more onerous than for an examination, except for the fact that in an APA the tax administration will need to have details of predictions and the basis for those predictions, which may not be central issues in a transfer pricing examination that focuses on completed transactions. In fact, an APA should seek to limit the documentation, as discussed above, and focus the documentation more closely on the issues in light of the taxpayer’s business practices. Tax administrations need to recognise that: a) Publicly available information on competitors and comparables is limited; b) Not all taxpayers have the capacity to undertake in-depth market analyses; and, c) Only parent companies may be knowledgeable about group pricing policies.” ...

In addition to the foregoing concerns, there are a number of possible pitfalls as described below that could arise if an APA program were improperly administered, and tax administrations who use APAs should make strong efforts to eliminate the occurrence of these problems as APA practice evolves ...

Concerns have also been expressed that, because of the nature of the APA procedure, it will interest taxpayers with a good voluntary compliance history. Experience in some countries has shown that, most often, taxpayers which would be interested in APAs are very large corporations which would be audited on a regular basis, with their pricing methodology then being examined in any event. The difference in the examination conducted of their transfer pricing would be one of timing rather than extent. As well, it has not been demonstrated that APAs will be of interest solely or principally to such taxpayers. Indeed, there are some early indications that taxpayers, having experienced difficulty with tax administrations on transfer pricing issues and not wishing these difficulties to continue, are often interested in applying for an APA. There is then a serious danger of audit resources and expertise being diverted to these taxpayers and away from the investigation of less compliant taxpayers, where these resources could be better deployed in reducing the risk of losing tax revenue. The balance of compliance resources may be particularly difficult to achieve since an APA programme tends to require highly experienced and often specialised staff. Requests for APAs may be concentrated in particular areas or sectors, e.g. global trading, and this can overstretch the specialist resources already allocated to those areas by the authorities. Tax administrations require time to train experts in specialist fields in order to meet unforeseeable demands from taxpayers for APAs in those areas ...

Another potential disadvantage could occur where one tax administration has undertaken a number of bilateral APAs which involve only certain of the associated enterprises within an MNE group. A tendency may exist to harmonise the basis for concluding later APAs in a way similar to those previously concluded without sufficient regard being had to the conditions operating in other markets. Care should therefore be taken with interpreting the results of previously concluded APAs as being representative across all markets ...

An APA program may initially place a strain on transfer pricing audit resources, as tax administrations will generally have to divert resources earmarked for other purposes (e.g. examination, advising, litigation, etc.) to the APA programme. Demands may be made on the resources of a tax administration by taxpayers seeking the earliest possible conclusion to an APA request, keeping in mind their business objectives and time scales, and the APA programme as a whole will tend to be led by the demands of the business community. These demands may not coincide with the resource planning of the tax administrations, thereby making it difficult to process efficiently both the APAs and other equally important work. Renewing an APA, however, is likely to be less time-consuming than the process of initiating an APA. The renewal process may focus on updating and adjusting facts, business and economic criteria, and computations. In the case of bilateral arrangements, the agreement of the competent authorities of both Contracting States is to be obtained on the renewal of an APA to avoid double taxation (or non-taxation) ...

Another possible disadvantage would arise if an APA involved an unreliable prediction on changing market conditions without adequate critical assumptions, as discussed above. To avoid the risk of double taxation, it is necessary for an APA program to remain flexible, because a static APA may not satisfactorily reflect arm’s length conditions ...

Another problem with a unilateral APA is the issue of corresponding adjustments. The flexibility of an APA may lead the taxpayer and the associated party to accommodate their pricing to the range of permissible pricing in the APA. In a unilateral APA, it is critical that this flexibility preserve the arm’s length principle since a foreign competent authority is not likely to allow a corresponding adjustment arising out of an APA that is inconsistent, in its view, with the arm’s length principle ...

Unilateral APAs may present significant problems for tax administrations and taxpayers alike. From the point of view of other tax administrations, problems arise because they may disagree with the APA’s conclusions. From the point of view of the associated enterprises involved, one problem is the possible effect on the behaviour of the associated enterprises. Unlike bilateral or multilateral APAs, the use of unilateral APAs may not lead to an increased level of certainty for the taxpayer involved and a reduction in economic or juridical double taxation for the MNE group. If the taxpayer accepts an arrangement that over-allocates income to the country making the APA in order to avoid lengthy and expensive transfer pricing enquiries or excessive penalties, the administrative burden shifts from the country providing the APA to other tax jurisdictions. Taxpayers should not feel compelled to enter into APAs for these reasons ...

The disclosure and information aspects of an APA programme as well as the cooperative attitude under which an APA can be negotiated may assist tax administrations in gaining insight into complex international transactions undertaken by MNEs. An APA programme can improve knowledge and understanding of highly technical and factual circumstances in areas such as global trading and the tax issues involved. The development of specialist skills that focus on particular industries or specific types of transactions will enable tax administrations to give better service to other taxpayers in similar circumstances. Through an APA programme tax administrations have access to useful industry data and analysis of pricing methodologies in a cooperative environment ...

Bilateral and multilateral APAs substantially reduce or eliminate the possibility of juridical or economic double or non taxation since all the relevant countries participate. By contrast, unilateral APAs do not provide certainty in the reduction of double taxation because tax administrations affected by the transactions covered by the APA may consider that the methodology adopted does not give a result consistent with the arm’s length principle. In addition, bilateral and multilateral APAs can enhance the mutual agreement procedure by significantly reducing the time needed to reach an agreement since competent authorities are dealing with current data as opposed to prior year data that may be difficult and time-consuming to produce ...

An APA may prevent costly and time-consuming examinations and litigation of major transfer pricing issues for taxpayers and tax administrations. Once an APA has been agreed, less resources may be needed for subsequent examination of the taxpayer’s return, because more information is known about the taxpayer. It may still be difficult, however, to monitor the application of the arrangement. The APA process itself may also present time savings for both taxpayers and tax administrations over the time that would be spent in a conventional examination, although in the aggregate there may be no net time savings, for example, in jurisdictions that do not have an audit procedure and where the existence of an APA may not directly affect the amount of resources devoted to compliance ...

APAs can provide an opportunity for both tax administrations and taxpayers to consult and cooperate in a non-adversarial spirit and environment. The opportunity to discuss complex tax issues in a less confrontational atmosphere than in a transfer pricing examination can stimulate a free flow of information among all parties involved for the purpose of coming to a legally correct and practicably workable result. The non-adversarial environment may also result in a more objective review of the submitted data and information than may occur in a more adversarial context (e.g. litigation). The close consultation and cooperation required between the tax administrations in an APA program also leads to closer relations with treaty partners on transfer pricing issues ...

An APA programme can assist taxpayers by eliminating uncertainty through enhancing the predictability of tax treatment in international transactions. Provided the critical assumptions are met, an APA can provide the taxpayers involved with certainty in the tax treatment of the transfer pricing issues covered by the APA for a specified period of time. In some cases, an APA may also provide an option to extend the period of time to which it applies. When the term of an APA expires, the opportunity may also exist for the relevant tax administrations and taxpayers to renegotiate the APA. Because of the certainty provided by an APA, a taxpayer may be in a better position to predict its tax liabilities, thereby providing a tax environment that is favourable for investment ...

Some countries lack the basis in their domestic law to enter into APAs. However, when a tax convention contains a clause regarding the mutual agreement procedure similar to Article 25 of the OECD Model Tax Convention, the competent authorities generally should be allowed to conclude an APA, if transfer pricing issues were otherwise likely to result in double taxation, or would raise difficulties or doubts as to the interpretation or application of the Convention. Such an arrangement would be legally binding for both States and would create rights for the taxpayers involved. Inasmuch as double tax treaties take precedence over domestic law, the lack of a basis in domestic law to enter into APAs would not prevent application of APAs on the basis of a mutual agreement procedure ...

Tax administrations might additionally rely on general domestic authority to administer taxes as the authority for entering into APAs. In some countries tax administrations may be able to issue specific administrative or procedural guidelines to taxpayers describing the appropriate tax treatment of transactions and the appropriate pricing methodology. As mentioned above, the tax codes of some OECD member countries include provisions that allow taxpayers to obtain specific rulings for different purposes. Even though these rulings were not designed specifically to cover APAs, they may be broad enough to be used to include APAs ...

APAs involving the competent authority of a treaty partner should be considered within the scope of the mutual agreement procedure under Article 25 of the OECD Model Tax Convention, even though such arrangements are not expressly mentioned there. Paragraph 3 of that Article provides that the competent authorities shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. Although paragraph 50 of the Commentary indicates that the matters covered by this paragraph are difficulties of a general nature concerning a category of taxpayers, it specifically acknowledges that the issues may arise in connection with an individual case. In a number of cases, APAs arise from cases where the application of transfer pricing to a particular category of taxpayer gives rise to doubts and difficulties. Paragraph 3 of Article 25 also indicates that the competent authorities may consult together for the elimination of double taxation in cases not provided for in the Convention. Bilateral APAs should fall within this provision because they have as one of their objectives the avoidance of double taxation. Even though the Convention provides for transfer pricing adjustments, it specifies no particular methodologies or procedures other than the arm’s length principle as set out in Article 9. Thus, it could be considered that APAs are authorised by paragraph 3 of Article 25 because the specific transfer pricing cases subject to an APA are not otherwise provided for in the Convention. The exchange of information provision in Article 26 also could facilitate APAs, as it provides for cooperation between competent authorities in the form of exchanges of information ...

An APA should be subject to cancellation, even retroactively, in the case of fraud or misrepresentation of information during an APA negotiation, or when a taxpayer fails to comply with the terms and conditions of an APA. Where an APA is proposed to be cancelled or revoked, the tax administration proposing the action should notify the other tax administrations of its intention and of the reasons for such action ...

Each tax administration involved in the APA will naturally wish to monitor compliance with the APA by the taxpayers in its jurisdiction, and this is generally done in two ways. First, it may require a taxpayer that has entered into an APA to file annual reports demonstrating the extent of its compliance with the terms and conditions of the APA and that critical assumptions remain relevant. Second, the tax administration may continue to examine the taxpayer as part of the regular audit cycle but without re- evaluating the methodology. Instead, the tax administration may limit the examination of the transfer pricing to verifying the initial data relevant to the APA proposal and determining whether or not the taxpayer has complied with the terms and conditions of the APA. With regard to transfer pricing, a tax administration may also examine the reliability and accuracy of the representations in the APA and annual reports and the accuracy and consistency of how the particular methodology has been applied. All other issues not associated with the APA fall under regular audit jurisdiction ...

An APA may cover all of the transfer pricing issues of a taxpayer (as is preferred by some countries) or may provide a flexibility to the taxpayer to limit the APA request to specified affiliates and intercompany transactions. An APA would apply to prospective years and transactions and the actual term would depend on the industry, products or transactions involved. The associated enterprises may limit their request to specified prospective tax years. An APA can provide an opportunity to apply the agreed transfer pricing methodology to resolve similar transfer pricing issues in open prior years. However, this application would require the agreement of the tax administration, the taxpayer, and, where appropriate, the treaty partner ...

At the conclusion of an APA process, the tax administrations should provide confirmation to the associated enterprises in their jurisdiction that no transfer pricing adjustment will be made as long as the taxpayer follows the terms of the arrangements. There should also be a provision in an APA (perhaps by reference to a range) that provides for possible revision or cancellation of the arrangement for future years when business operations change significantly, or when uncontrolled economic circumstances (e.g. significant changes in currency exchange rates) critically affect the reliability of the methodology in a manner that independent enterprises would consider significant for purposes of their transfer pricing ...

Typically, associated enterprises are allowed to participate in the process of obtaining an APA, by presenting the case to and negotiating with the tax administrations concerned, providing necessary information, and reaching agreement on the transfer pricing issues. From the associated enterprises’ perspective, this ability to participate may be seen as an advantage over the conventional mutual agreement procedure ...

The cooperation of the associated enterprises is vital to a successful APA negotiation. For example, the associated enterprises ordinarily would be expected to provide the tax administrations with the methodology that they consider most reasonable under the particular facts and circumstances. The associated enterprises also should submit documentation supporting the reasonableness of their proposal, which would include, for example, data relating to the industry, markets, and countries to be covered by the agreement. In addition, the associated enterprises may identify uncontrolled businesses that are comparable or similar to the associated enterprises’ businesses in terms of the economic activities performed and the transfer pricing conditions, e.g. economic costs and risks incurred, and perform a functional analysis as described in Chapter I of these Guidelines ...

APAs, including unilateral ones, differ in some ways from more traditional private rulings that some tax administrations issue to taxpayers. An APA generally deals with factual issues, whereas more traditional private rulings tend to be limited to addressing questions of a legal nature based on facts presented by a taxpayer. The facts underlying a private ruling request may not be questioned by the tax administration, whereas in an APA the facts are likely to be thoroughly analysed and investigated. In addition, an APA usually covers several transactions, several types of transactions on a continuing basis, or all of a taxpayer’s international transactions for a given period of time. In contrast, a private ruling request usually is binding only for a particular transaction ...

Tax administrations may find APAs particularly useful in profit allocation or income attribution issues arising in the context of global securities and commodity trading operations, and also in handling multilateral cost contribution arrangements. The concept of APAs also may be useful in resolving issues raised under Article 7 of the OECD Model Tax Convention relating to allocation problems, permanent establishments, and branch operations ...

Because of concerns over double taxation, most countries prefer bilateral or multilateral APAs (i.e. an arrangement in which two or more countries concur), and indeed some countries will not grant a unilateral APA (i.e. an arrangement between the taxpayer and one tax administration) to taxpayers in their jurisdiction. The bilateral (or multilateral) approach is far more likely to ensure that the arrangements will reduce the risk of double taxation, will be equitable to all tax administrations and taxpayers involved, and will provide greater certainty to the taxpayers concerned. It is also the case in some countries that domestic provisions do not permit the tax administrations to enter into binding agreements directly with the taxpayers, so that APAs can be concluded with the competent authority of a treaty partner only under the mutual agreement procedure. For purposes of the discussion in this section, an APA is not intended to include a unilateral arrangement except where specific reference to a unilateral APA is made ...

Some countries allow for unilateral arrangements where the tax administration and the taxpayer in its jurisdiction establish an arrangement without the involvement of other interested tax administrations. However, a unilateral APA may affect the tax liability of associated enterprises in other tax jurisdictions. Where unilateral APAs are permitted, the competent authorities of other interested jurisdictions should be informed about the procedure as early as possible to determine whether they are willing and able to consider a bilateral arrangement under the mutual agreement procedure. In any event, countries should not include in any unilateral APA they may conclude with a taxpayer a requirement that the taxpayer waive access to the mutual agreement procedure if a transfer pricing dispute arises, and if another country raises a transfer pricing adjustment with respect to a transaction or issue covered by the unilateral APA, the first country is encouraged to consider the appropriateness of a corresponding adjustment and not to view the unilateral APA as an irreversible settlement ...

In sum, the reliability of a prediction depends on the facts and circumstances of each actual case. Taxpayers and tax administrations need to pay close attention to the reliability of a prediction when considering the scope of an APA. Unreliable predictions should not be included in APAs. The appropriateness of a method and its application can usually be predicted, and the relevant critical assumptions made, with more reliability than future results (price or profit level) ...

In deciding how specific an APA can be in a particular case, tax administrations should recognise that predictions of absolute future profit experience seems least plausible. It may be possible to use profit ratios of independent enterprises as comparables, but these also are often volatile and hard to predict. Use of appropriate critical assumptions and use of ranges may enhance the reliability of predictions. Historical data in the industry in question can also be a guide ...

As another example, it would not be appropriate to specify a profit split formula between associated enterprises if it is expected that the allocation of functions between the enterprises will be unstable. It would, however, be possible to prescribe a profit split formula if the role of each enterprise were articulated in critical assumptions. In certain cases, it might even be possible to make a reasonable prediction on the appropriateness of an actual profit split ratio if enough assumptions were provided. (Additional guidance for conducting Advance Pricing Arrangements under the Mutual Agreement Procedure is found in the Annex to Chapter IV.) ...

The reliability of any prediction used in an APA depends both on the nature of the prediction and the critical assumptions on which the prediction is based. For example, it would not be reasonable to assert that the arm’s length short-term borrowing rate for a certain corporation on intra- group borrowings will remain at six percent during the entire coming three years. It would be more plausible to predict that the rate will be LIBOR plus a fixed percentage. The prediction would become even more reliable if an appropriate critical assumption were added regarding the company’s credit rating (e.g. the addition to LIBOR will change if the credit rating changes) ...

One key issue in the concept of APAs is how specific they can be in prescribing a taxpayer’s transfer pricing over a period of years, for example whether only the transfer pricing methodology or more particular results can be fixed in a particular case. In general, great care must be taken if the APA goes beyond the methodology, the way it will be applied, and the critical assumptions, because more specific conclusions rely on predictions about future events ...

An advance pricing arrangement (“APA”) is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time. An APA is formally initiated by a taxpayer and requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax administrations. APAs are intended to supplement the traditional administrative, judicial, and treaty mechanisms for resolving transfer pricing issues. They may be most useful when traditional mechanisms fail or are difficult to apply. Detailed guidelines for conducting advance pricing arrangements under the mutual agreement procedure (“MAP APAs”) were adopted in October 1999 and are found as an annex to this chapter ...

In addition, bilateral APAs with treaty partners should conform to certain requirements. For example, the same necessary and pertinent information should be made available to each tax administration at the same time, and the agreed upon methodology should be in accordance with the arm’s length principle ...

Between those countries that use APAs, greater uniformity in APA practices could be beneficial to both tax administrations and taxpayers. Accordingly, the tax administrations of such countries may wish to consider working agreements with the competent authorities for the undertaking of APAs. These agreements may set forth general guidelines and understandings for the reaching of mutual agreement in cases where a taxpayer has requested an APA involving transfer pricing issues ...

As discussed above, the nature of APA proceedings may de facto limit their accessibility to large taxpayers. The restriction of APAs to large taxpayers may raise questions of equality and uniformity, since taxpayers in identical situations should not be treated differently. A flexible allocation of examination resources may alleviate these concerns. Tax administrations also may need to consider the possibility of adopting a streamlined access for small taxpayers. Tax administrations should take care to adapt their levels of inquiry, in evaluating APAs, to the size of the international transactions involved ...

Wherever possible, an APA should be concluded on a bilateral or multilateral basis between competent authorities through the mutual agreement procedure of the relevant treaty. A bilateral APA carries less risk of taxpayers feeling compelled to enter into an APA or to accept a non-arm’s-length agreement in order to avoid expensive and prolonged enquiries and possible penalties. A bilateral APA also significantly reduces the chance of any profits either escaping tax altogether or being doubly taxed, Moreover, concluding an APA through the mutual agreement procedure may be the only form that can be adopted by a tax administration which lacks domestic legislation to conclude binding agreements directly with the taxpayer ...

When considering the scope of an APA, taxpayers and tax administrations need to pay close attention to the reliability of any predictions so as to exclude unreliable predictions. In general, great care must be taken if the APA goes beyond the methodology, its application, and critical assumptions. See paragraphs 4.124-4.129 ...

There are some continuing issues regarding the form and scope of APAs that require greater experience for full resolution and agreement among Member countries, such as the question of unilateral APAs. While it is too early to make a final recommendation whether the expansion of such programmes should be encouraged, it seems likely that in certain circumstances they will aid in resolving transfer pricing disputes. The Committee on Fiscal Affairs intends to monitor carefully any expanded use of APAs and to promote greater consistency in practice among those countries that choose to use them ...

At present, only a few OECD Member Countries have experience with APAs. Those countries which do have some experience seem to be satisfied so far, so that it can be expected that under the appropriate circumstances the experience with APAs will continue to expand. The success of APA programs will depend on the care taken in determining the proper degree of specificity for the arrangement based on critical assumptions, the proper administration of the program, and the presence of adequate safeguards to avoid the pitfalls described above, in addition to the flexibility and openness with which all parties approach the process ...

An APA program cannot be used by all taxpayers because the procedure can be expensive and time-consuming and small taxpayers generally may not be able to afford it. This is especially true if independent experts are involved. APAs may therefore only assist in resolving mainly large transfer pricing cases. In addition, the resource implications of an APA program may limit the number of requests a tax administration can entertain. In evaluating APAs, tax administrations can alleviate these potential problems by ensuring that the level of inquiry is adjusted to the size of the international transactions involved ...

Tax administrations also should ensure the confidentiality of trade secrets and other sensitive information and documentation submitted to them in the course of an APA proceeding. Therefore, domestic rules against disclosure should be applied. In a bilateral APA the confidentiality requirements on treaty partners would apply, thereby preventing public disclosure of confidential data ...

Problems could also develop if tax administrations misuse information obtained in an APA in their examination practices. If the taxpayer withdraws from its APA request or if the taxpayer’s application is rejected after consideration of all of the facts, any nonfactual information provided by the taxpayer in connection with the APA request, such as settlement offers, reasoning, opinions, and judgments, cannot be treated as relevant in any respect to the examination. In addition, the fact that a taxpayer has applied unsuccessfully for an APA should not be taken into account by the tax administration in determining whether to commence an examination of that taxpayer ...

Another possible concern is that an APA may allow the tax administration to make a closer study of the transactions at issue than would occur in the context of a transfer pricing examination, depending on the facts and circumstances. The taxpayer must provide detailed information relating to its transfer pricing and satisfy any other requirements imposed for the verification of compliance with the terms and conditions of the APA. At the same time, the taxpayer is not sheltered from normal and routine examinations by the tax administration on other issues. An APA also does not shelter a taxpayer from examination of its transfer pricing activities. The taxpayer may still have to establish that it has complied in good faith with the terms and conditions of the APA, that the material representations in the APA remain valid, that the supporting data used in applying the methodology were correct, that the critical assumptions underlying the APA are still valid and are applied consistently, and that the methodology is applied consistently. Tax administrations should, therefore, seek to ensure that APA procedures are not unnecessarily cumbersome and that they do not make more demand of taxpayers than are strictly required by the scope of the APA application ...

For example, an APA might seek more detailed industry and taxpayer specific information than would be requested in a transfer pricing examination. In principle, this should not be the case and the documentation required for an APA should not be more onerous than for an examination, except for the fact that in an APA the tax administration will need to have details of predictions and the basis for those predictions, which may not be central issues in a transfer pricing examination that focuses on completed transactions. In fact, an APA should seek to limit the documentation, as discussed above, and focus the documentation more closely on the issues in light of the taxpayer’s business practices. Tax administrations need to recognize that :a) publicly available information on competitors and comparables is limited;b) not all taxpayers have the capacity to undertake in-depth market analyses; andc) only parent companies may be knowledgeable about group pricing policies ...

In addition to the foregoing concerns, there are a number of possible pitfalls as described below that could arise if an APA program were improperly administered, and tax administrations who use APAs should make strong efforts to eliminate the occurrence of these problems as APA practice evolves ...

Concerns have also been expressed that, because of the nature of the APA procedure, it will interest taxpayers with a good voluntary compliance history. Experience in some countries has shown that, most often, taxpayers which would be interested in APAs are very large corporations which would be audited on a regular basis, with their pricing methodology then being examined in any event. The difference in the examination conducted of their transfer pricing would be one of timing rather than extent. As well, it has not been demonstrated that APAs will be of interest solely or principally to such taxpayers. Indeed, there are some early indications that taxpayers, having experienced difficulty with tax administrations on transfer pricing issues and not wishing these difficulties to continue, are often interested in applying for an APA. There is then a serious danger of audit resources and expertise being diverted to these taxpayers and away from the investigation of less compliant taxpayers, where these resources could be better deployed in reducing the risk of losing tax revenue. The balance of compliance resources may be particularly difficult to achieve since an APA programme tends to require highly experienced and often specialised staff. Requests for APAs may be concentrated in particular areas or sectors, e.g. global trading, and this can overstretch the specialist resources already allocated to those areas by the authorities. Tax administrations require time to train experts in specialist fields in order to meet unforeseeable demands from taxpayers for APAs in those areas ...

Another potential disadvantage could occur where one tax administration has undertaken a number of bilateral APAs which involve only certain of the associated enterprises within an MNE group. A tendency may exist to harmonise the basis for concluding later APAs in a way similar to those previously concluded without sufficient regard being had to the conditions operating in other markets. Care should therefore be taken with interpreting the results of previously concluded APAs as being representative across all markets ...

An APA program may initially place a strain on transfer pricing audit resources, as tax administrations will generally have to divert resources earmarked for other purposes (e.g. examination, advising, litigation, etc.) to the APA programme. Demands may be made on the resources of a tax administration by taxpayers seeking the earliest possible conclusion to an APA request, keeping in mind their business objectives and time scales, and the APA programme as a whole will tend to be led by the demands of the business community. These demands may not coincide with the resource planning of the tax administrations, thereby making it difficult to process efficiently both the APAs and other equally important work. Renewing an APA, however, is likely to be less time-consuming than the process of initiating an APA. The renewal process may focus on updating and adjusting facts, business and economic criteria, and computations. In the case of bilateral arrangements, the agreement of the competent authorities of both Contracting States is to be obtained on the renewal of an APA to avoid double taxation (or non-taxation) ...

Another possible disadvantage would arise if an APA involved an unreliable prediction on changing market conditions without adequate critical assumptions, as discussed above. To avoid the risk of double taxation, it is necessary for an APA program to remain flexible, because a static APA may not satisfactorily reflect arm’s length conditions ...

Another problem with a unilateral APA is the issue of corresponding adjustments. The flexibility of an APA may lead the taxpayer and the related party to accommodate their pricing to the range of permissible pricing in the APA. In a unilateral APA, it is critical that this flexibility preserve the arm’s length principle since a foreign competent authority is not likely to allow a corresponding adjustment arising out of an APA that is inconsistent, in its view, with the arm’s length principle ...

Unilateral APAs may present significant problems for tax administrations and taxpayers alike. From the point of view of other tax administrations, problems arise because they may disagree with the APA’s conclusions. From the point of view of the associated enterprises involved, one problem is the possible effect on the behaviour of the associated enterprises. Unlike bilateral or multilateral APAs, the use of unilateral APAs may not lead to an increased level of certainty for the taxpayer involved and a reduction in economic or juridical double taxation for the MNE group. If the taxpayer accepts an arrangement that over-allocates income to the country making the APA in order to avoid lengthy and expensive transfer pricing enquiries or excessive penalties, the administrative burden shifts from the country providing the APA to other tax jurisdictions. Taxpayers should not feel compelled to enter into APAs for these reasons ...

The disclosure and information aspects of an APA programme as well as the cooperative attitude under which an APA can be negotiated may assist tax administrations in gaining insight into complex international transactions undertaken by MNEs. An APA programme can improve knowledge and understanding of highly technical and factual circumstances in areas such as global trading and the tax issues involved. The development of specialist skills that focus on particular industries or specific types of transactions will enable tax administrations to give better service to other taxpayers in similar circumstances. Through an APA programme tax administrations have access to useful industry data and analysis of pricing methodologies in a cooperative environment ...

Bilateral and multilateral APAs substantially reduce or eliminate the possibility of juridical or economic double or non taxation since all the relevant countries participate. By contrast, unilateral APAs do not provide certainty in the reduction of double taxation because tax administrations affected by the transactions covered by the APA may consider that the methodology adopted does not give a result consistent with the arm’s length principle. In addition, bilateral and multilateral APAs can enhance the mutual agreement procedure by significantly reducing the time needed to reach an agreement since competent authorities are dealing with current data as opposed to prior year data that may be difficult and time-consuming to produce ...

An APA may prevent costly and time-consuming examinations and litigation of major transfer pricing issues for taxpayers and tax administrations. Once an APA has been agreed, less resources may be needed for subsequent examination of the taxpayer’s return, because more information is known about the taxpayer. It may still be difficult, however, to monitor the application of the arrangement. The APA process itself may also present time savings for both taxpayers and tax administrations over the time that would be spent in a conventional examination, although in the aggregate there may be no net time savings, for example, in jurisdictions that do not have an audit procedure and where the existence of an APA may not directly affect the amount of resources devoted to compliance ...

APAs can provide an opportunity for both tax administrations and taxpayers to consult and cooperate in a non-adversarial spirit and environment. The opportunity to discuss complex tax issues in a less confrontational atmosphere than in a transfer pricing examination can stimulate a free flow of information among all parties involved for the purpose of coming to a legally correct and practicably workable result. The non-adversarial environment may also result in a more objective review of the submitted data and information than may occur in a more adversarial context (e.g. litigation). The close consultation and cooperation required between the tax administrations in an APA program also leads to closer relations with treaty partners on transfer pricing issues ...

An APA programme can assist taxpayers by eliminating uncertainty through enhancing the predictability of tax treatment in international transactions. Provided the critical assumptions are met, an APA can provide the taxpayers involved with certainty in the tax treatment of the transfer pricing issues covered by the APA for a specified period of time. In some cases, an APA may also provide an option to extend the period of time to which it applies. When the term of an APA expires, the opportunity may also exist for the relevant tax administrations and taxpayers to renegotiate the APA. Because of the certainty provided by an APA, a taxpayer may be in a better position to predict its tax liabilities, thereby providing a tax environment that is favourable for investment ...

Some countries lack the basis in their domestic law to enter into APAs. However, when a tax convention contains a clause regarding the mutual agreement procedure similar to Article 25 of the OECD Model Tax Convention, the competent authorities generally should be allowed to conclude an APA, if transfer pricing issues were otherwise likely to result in double taxation, or would raise difficulties or doubts as to the interpretation or application of the Convention. Such an arrangement would be legally binding for both States and would create rights for the taxpayers involved. Inasmuch as double tax treaties take precedence over domestic law, the lack of a basis in domestic law to enter into APAs would not prevent application of APAs on the basis of a mutual agreement procedure ...

Tax administrations might additionally rely on general domestic authority to administer taxes as the authority for entering into APAs. In some countries tax administrations may be able to issue specific administrative or procedural guidelines to taxpayers describing the appropriate tax treatment of transactions and the appropriate pricing methodology. As mentioned above, the tax codes of some OECD Member countries include provisions that allow taxpayers to obtain specific rulings for different purposes. Even though these rulings were not designed specifically to cover APAs, they may be broad enough to be used to include APAs ...