On 16 October 2024 the UN Tax Committee discussed transfer pricing issues. The transfer pricing subcommittee presented for approval a paper on dispute resolution addressing the implementation of advance pricing agreement (APA) programs. The Subcommittee also presented a revised version of a draft Appendix to the guidance on transfer pricing in the pharmaceutical industry, containing potential questions that could be used to analyse the FAR (functions, assets and risks) of a controlled entity.
The paper on APA programs takes the form of frequently asked questions and looks particularly at the position of developing countries. The paper notes that the advantage of an APA for the taxpayer is that it may prevent costly transfer pricing examinations and litigation of major transfer pricing issues. For the tax administration, concluding an APA is an effective alternative to the need to resolve transfer pricing disputes. The APA also offers a chance to resolve issues from prior years by rolling back the agreed pricing method to those periods.
The obligations for the taxpayer in concluding an APA include the need to provide the tax administration with detailed up-front information on the industry, the company itself and the transactions. The APA process would normally require the taxpayer to provide annual reports or information on the application of the APA in taxable years covered by the agreement. This would normally consist of summaries of the taxpayer’s business operations in the year, demonstrating compliance with the terms and conditions of the APA.
For the tax administration there are costs associated with the APA program. The program potentially takes up resources at different levels of the tax administration and some tax authorities therefore may prefer not to launch an APA program until they have built up sufficient capacity. Other tax authorities prefer to implement an APA program at an earlier stage to help capacity building in their transfer pricing team.
Countries can provide in their domestic law for the authority to enter into APAs; or they could set this out in administrative guidance. In particular, common law jurisdictions may only require administrative guidance. General provisions authorising the issue of rulings may also be a sufficient legal basis for APAs.
A specific provision in domestic law could outline the circumstances under which an APA application may be made and the taxpayers that can request an APA. The domestic law provisions could also detail the application process including the form, fees payable and the deadlines. The provision should clarify who is the responsible authority within the government for dealing with the APA application.
A tax authority may initially prefer to limit the availability of APAs to certain kinds of transactions, while building up expertise. The APA program could focus on simpler transaction types or particular industries, such as industries that are important in that jurisdiction. The APAs could be managed by a specialised team within the tax authority. A number of jurisdictions with established APA programs have combined the mutual agreement procedure (MAP) and APA functions to improve efficiency as there are structural similarities between the two processes. Placing the APA function within audit teams could lead to conflict in relation to the appropriate use of information.
The paper notes that the procedure for concluding an APA could begin with preliminary discussions between taxpayer and tax authorities before the formal application by the taxpayer to the tax authorities of the relevant jurisdictions. Those tax authorities should reach a decision on accepting the APA; and gather the information they require. After analysing the information the competent authorities would prepare position papers and negotiate. Following agreement between the competent authorities they would conclude the agreement with the taxpayer and proceed with implementation. During the period covered by the APA there would be annual compliance monitoring.
