APA
Advance pricing arrangement (APA)
Advance pricing arrangements (APAs) 1 are an important tool for companies operating internationally. They make it possible to agree in advance the methods for pricing transactions between related parties, minimising tax risk and the uncertainty connected with future tax liabilities.
The process of concluding advance pricing arrangements
An APA may cover all issues relating to the setting of a transfer price, or it may leave taxpayers free to apply it to certain related parties or intra-group transactions. In general, advance pricing arrangements apply to future years and to transactions that are only planned, and enterprises applying for an APA may limit their request and indicate the particular tax years they are interested in.
Review of and consent to an advance pricing arrangement
An arrangement may also be applied to past tax years that are not time-barred, provided that:
a) the transaction and its conditions are substantially similar to those described in the arrangement, and
b) the tax administration consents to such a practice.
Monitoring compliance with the terms of the arrangement
Once an application for an APA has been filed, related enterprises are expected to present to the tax administrations the transfer pricing methodology they consider most appropriate for the transactions to be covered by the arrangement. Applicants should in addition supply all the documents needed to substantiate that their proposal is reasonable, including, for example, data on the situation in the industry, on the markets and in the countries the arrangement is to concern. Related parties they may also identify comparable transactions carried out on the open market that are close to the transaction under review in terms of their subject matter, conditions, the functions performed by the parties, the assets they engage and the risks they assume.
By concluding an advance pricing arrangement the taxpayer gains certainty that, as long as it observes the agreed terms of the APA, no transfer pricing adjustments will be made to the transactions concerned. This does not mean, however, that going through the APA procedure makes the agreement between the taxpayer and the tax administration absolutely binding for the whole period for which it was concluded. If the key conditions of the transaction change materially, both the taxpayer and the tax administration may seek to revise the agreement or to withdraw from it.
An advance pricing arrangement may be unilateral, bilateral or multilateral. A unilateral APA is permitted only by some countries and consists in an arrangement between a tax administration and a taxpayer subject to it, without the participation of the tax administrations of other countries concerned. It should be noted that an arrangement of this kind does not remove the risk of double taxation. For that reason most countries prefer bilateral and multilateral APAs involving two or more states. Such arrangements limit, if they do not eliminate entirely, the risk of double taxation, ensure that the solution chosen is seen as fairer from the point of view of all parties concerned, and give taxpayers greater certainty in respect of the transactions covered.
The tax administrations party to an APA are entitled to monitor compliance with its terms. They may do so in two ways. The first is to require the taxpayer to file annual reports showing the extent to which it has complied with the provisions of the APA and respected the critical assumptions. The second way of checking whether the taxpayer's conduct conforms to the arrangement it has concluded is to subject it to a normal transfer pricing review, with the difference that the transfer pricing method used by the taxpayer is not reassessed. The tax administration may also verify the reliability and accuracy of the data contained in the APA and in the annual reports filed by the taxpayer as regards the correct application of the transfer pricing method indicated. It should be added that an advance pricing arrangement may be annulled, even retroactively, in the event of fraud, the presentation of false data during negotiation of the terms of the APA, or the taxpayer's failure to observe the provisions and conditions of the arrangement.
Benefits of concluding an advance pricing arrangement:
- removing taxpayers' uncertainty by making tax proceedings in international transactions more predictable. The taxpayer can thus better anticipate its tax liabilities and so maintain a higher degree of financial liquidity,
- discussing complex tax issues in a less confrontational atmosphere than during a transfer pricing review, which should lead to more objective outcomes than in a contentious situation such as a fiscal audit or litigation,
- reducing the money and time spent by both taxpayers and tax administrations on reviewing transfer prices. This is because the fiscal authorities have a great deal of information about the taxpayer when they begin the APA procedure,
- bilateral and multilateral APAs significantly limit or entirely eliminate the risk of double taxation in respect of the transaction covered by the arrangement,
- carrying out the APA procedure allows representatives of the tax administration to acquire specialist knowledge and skills relating to particular sectors or specific types of transaction. They are then better able to deal with other taxpayers in a situation similar to that of the applicant for the APA.
Drawbacks of concluding an advance pricing arrangement:
- concluding a unilateral APA does not remove the risk of double taxation, and further problems may arise where the tax administration of the other country concerned by the transaction covered by the unilateral arrangement is unwilling to accept its provisions,
- excessive flexibility in an APA may lead the taxpayer and its related enterprise to adjust their pricing to the range permitted in the APA. It is therefore important that in a unilateral APA this flexibility is consistent with the arm's length principle, as otherwise foreign tax authorities will be unwilling to allow the corresponding adjustment arising from the arrangement,
- where entities belonging to a multinational group have already concluded a number of bilateral arrangements, there may be a dangerous tendency to conclude later APAs in a manner similar to the earlier ones, without sufficient regard for the conditions prevailing on other markets and in a different period,
- concluding an advance pricing arrangement may involve disclosing to the tax administration more detailed information about the taxpayer and its business than an ordinary transfer pricing review would require. This should as a rule not be the case, since the documentation required for an APA should not be more burdensome than that supplied during a transfer pricing audit, apart from preparing a detailed forecast of the assumed conditions of the future transaction,
- where no arrangement is concluded with the taxpayer, the tax administration may feel encouraged to carry out an audit. This is partly because the methodology proposed by the taxpayer has not been approved and because the tax administration already holds exhaustive documentation on the taxpayer before the audit begins,
- the price paid for preparing and signing an APA is relatively high, which means that not all taxpayers can afford to apply for one.
Fees and time limits for an APA
An APA may be concluded for any period, but not longer than five years. After that period renewal may be sought. A different application fee applies depending on the type of arrangement:
- Unilateral
fee for domestic entities: PLN 5,000 to PLN 50,000,
fee for a foreign entity: PLN 20,000 to PLN 100,000.
- Bilateral
fee: PLN 50,000 to PLN 200,000.
- Multilateral
In summary, advance pricing arrangements can be a useful tool for minimising tax risk. They make it possible to plan future burdens better and allow the taxpayer to avoid uncertainty as to whether the transfer pricing method it applies is correct. APAs are not, however, free of drawbacks, the greatest being the cost of concluding the arrangement and the length of the procedure itself. Every taxpayer should therefore consider for itself whether in its case the advantages of an advance pricing arrangement outweigh the disadvantages.
Notes
1 Prepared on the basis of: OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Chapter IV, Paris 2010.