APA 101 - DLA Piper APA and MAP Guide

What are the benefits of an APA?

APAs have become increasingly popular with MNEs in recent years as a mechanism for obtaining certainty and alleviating the risk of double taxation. The APA process, which is voluntary, provides a cooperative way of resolving disputes or potential disputes by generating a constructive working relationship between the taxpayer and the tax administration(s).

Eliminate double taxation

A bilateral or multilateral APA will eliminate the potential for double taxation.

Certainty

APAs provide a solution for taxpayers to resource-plan and manage their overall tax rate without the uncertainty of transfer pricing assessments.

Dispute resolution

APAs can be used to bring about long-term solutions to transfer pricing or other tax related disputes by resolving them on a prospective basis.

Reputation

The reputation of the taxpayer can be enhanced with tax administrations in numerous countries, as well as publicly, by working cooperatively toward an APA.

Cost savings

There can be compliance cost savings for the duration of the APA, in particular when considering the audit and dispute costs avoided.

Resource management

MNEs can manage their tax resources more effectively and efficiently by electing when and where to engage with tax administrations.

Formal considerations when requesting an APA

While a growing number of jurisdictions have implemented legislation or formal guidance establishing an APA program, the approach taken is not uniform. Considerations such as eligibility for an APA, filing fees and deadlines, procedures specifically designed for small and medium-sized enterprises (‘SMEs’), and rollback availability can vary significantly. As a result, such factors need to be taken into account before initiating the APA application process

Taxpayers need to ensure that the transaction(s) sought to be covered under the APA meet the relevant acceptance criteria. For instance, Albania, China, Georgia, Hong Kong, and Ukraine have set a minimum threshold for the value of the relevant inter-company transaction(s) that is required to be met in order to be eligible to apply for an APA. Whereas in countries such as France, Germany, the Netherlands, and the United States have specific guidance and procedures for SMEs that actively encourage APA applications, as long as the transaction(s) are sufficiently complex, and double taxation is a distinct possibility in the absence of an APA.

The approach taken in relation to filing fees also varies considerably. In the United States, Canada, and a number of continental European jurisdictions (including Albania, Austria, Czech Republic, Germany, Hungary, Luxembourg, Poland, Portugal, Romania, and Sweden) a filing fee is payable. On the other hand, some jurisdictions such as Australia, Japan, Singapore, and the United Kingdom do not charge a filing fee.

In addition to taxpayer specific considerations, each of the following should be considered before initiating the APA application procedure:

Acceptance criteria and collateral issues

Some jurisdictions will have guidance or discretionary practices that will be considered by the tax authority on determining whether a taxpayer is eligible to proceed with a formal APA application. Factors can include the size of the taxpayer’s organisation and the revenue it generates, the complexity of the transaction(s) intended to be covered by the APA, and any collateral issues such as outstanding administrative or judicial proceedings.

Timing requests and deadlines

Strict timing deadlines on the initiation of the APA application process and the submission of supporting documentation may be imposed on the taxpayer. Missing these deadlines could result in certain years not being covered by the APA.

Term limits

The taxpayer will discuss with the tax authorities at the pre-filing stage the term of the proposed APA. Typically, an APA will have a five-year term; however, this will vary depending on the jurisdiction and how flexible any local rules are.

Filing fees

A few jurisdictions require a filing fee to be paid, but most have no filing fee.

Rollback availablity

Some jurisdictions allow for the outcome of an APA to be applied retroactively to previous years (‘rollback’). Rollback availability is subject to the nature of transaction(s) to be covered under the APA and whether they are considered by the tax authority to be sufficiently similar to those in the prior years that the taxpayer seeks to cover.

Other considerations

For taxpayers seeking unilateral APAs, it should be noted that economic double taxation may arise if the tax administration of the other jurisdiction does not agree with the approach adopted in the APA. For bilateral and multilateral APAs, taxpayers are not involved in the negotiations between the tax authorities. These are governed by the MAP in the relevant double taxation treaties.

The APA application process

The APA application process is in many jurisdictions governed by legislation, regulations and/or procedural guidance issued by the tax administration. Typically, it involves a pre-filing stage, a formal application stage, a review and negotiation stage, and implementation and post-agreement compliance stages.

Pre-filing

At the pre-filing stage, taxpayers are encouraged, or are required in certain jurisdictions, to meet with the tax authority to initiate the formal APA application process. Pre-filing meetings generally involve:

A discussion of the appropriateness of an APA to the taxpayer’s circumstances;
The cross-border transaction(s) intended to be covered;
The proposed TP method;
The term of the proposed APA; and
Whether a unilateral, bilateral, or multilateral APA is sought.

In some jurisdictions, pre-filing can be conducted on an anonymous basis. After the pre-filing meeting, the tax authority will decide whether an APA is appropriate given the taxpayer’s circumstances.

Formal submission

Once the pre-filing stage has been concluded, the taxpayer may be invited to submit a formal APA application. Typically, this application will require:

Details of the cross-border transaction(s) intended to be covered by the APA;
A comparables analysis;
The selected TP method;
Critical assumptions; and
The term of the APA.

Review and negotiation

During the review and negotiation stage, the tax authority will analyse and evaluate the APA application and supporting documentation. The tax authority may require further documentation from the taxpayer in order to complete the review stage. For unilateral APAs the taxpayer will negotiate directly with the tax authority. For bilateral and multilateral APAs, the tax authority will negotiate with the relevant tax treaty partner(s) before putting an agreement to the taxpayer for signing.

Implementation & compliance

Once the APA has been signed and has become effective, it will in most cases be subject to annual compliance procedures. Taxpayers will be required to prepare and lodge a report for each income year covered by the APA, usually together with their tax return. This report will typically contain information and documentation sufficient to demonstrate compliance with the terms of the APA.

Renewal process

Jurisdictions with an established APA program usually allow for and have mechanisms to renew an APA at the request of the taxpayer. Renewals are more likely to be granted if the taxpayer requests the renewal within a reasonable period before expiry of the existing term, and can demonstrate that the circumstances have not changed significantly so as to warrant fresh negotiations.

Advance Pricing Agreements