APA pricing agreement
Advance pricing arrangements (APAs) 1 specify, prior to making controlled transactions, an appropriate set of criteria (including the method, objects of comparisons and appropriate adjustments thereto, and assumptions as to future events) necessary to make a transfer pricing for these transactions at a predetermined level. period. Pricing agreements typically cover several transactions, several types of recurring transactions, or the entirety of international transactions concluded by a taxpayer over a period of time.
An APA may cover all transfer pricing considerations, or it may leave taxpayers the option of using it for certain related entities or intra-group transactions. In general, Advance Pricing Agreements are applied to future years and deals to be made, and APA applicants can restrict their demands and identify specific tax years of interest.
The pricing agreement may also be applied to past tax years that are not time-barred, provided that:
(a) the transaction and its terms are substantially similar to those described in the agreement, and
b) obtaining the consent of the tax administration to do so.
Upon request for an APA, related companies are expected to submit to tax administrations the transfer pricing methodology they consider most appropriate for the transactions to be covered by the agreement. In addition, applicants should provide all the necessary documents justifying the rationale behind their proposal, including, for example, data on the industry, markets and countries where the price agreement is to be agreed. Related parties may also identify comparable transactions carried out on the free market, which are similar to the analyzed transaction in terms of subject matter, conditions, functions performed by the parties to the transaction, assets employed by them and the risks incurred.
By concluding an advance pricing agreement, the taxpayer can be sure that, as long as he adheres to the agreed APA conditions, no transfer pricing adjustments will be made to the transactions concerned. This does not mean, however, that carrying out the APA procedure will make the contract between the taxpayer and the tax administration absolutely valid for the entire period for which it was concluded. If the key terms of the transaction change significantly, both the taxpayer and the tax administration will be able to demand that the contract be revised or withdrawn.
The Advance Pricing Agreement may be unilateral, bilateral or multilateral. A unilateral APA is allowed only by some countries and consists in the preparation of an agreement between the tax administration and its subordinate taxpayer without the participation of interested tax administrations from other countries. It should be noted that an agreement of this type does not eliminate the risk of double taxation. For this reason, most countries prefer to conclude bi- and multilateral APAs in which two or more countries participate. Such pricing agreements reduce, if not completely eliminate, the risk of double taxation,
Tax administrations that are party to the APA have the right to monitor compliance with the terms of the agreement. They can do this in two ways. The first involves imposing on the taxpayer the obligation to submit annual reports showing the degree of compliance by him with the provisions of the APA agreement and compliance with the key assumptions. The second method of examining the compliance of the taxpayer’s conduct with the agreement concluded by him is subjecting him to the normal transfer pricing verification, with the difference that the method of determining the transfer pricing 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 submitted by the taxpayer in terms of the correct application of the indicated transfer valuation method. It should be added,
Advantages of concluding an Advance Pricing Agreement:
- eliminating taxpayers’ uncertainty by increasing the predictability of tax proceedings in international transactions. Thanks to this, the taxpayer can better predict his tax liabilities and thus maintain a higher degree of financial liquidity,
- discussing complex tax problems in a less confrontational atmosphere than when examining the transfer valuation, which should lead to the achievement of more objective results than in a disputed situation (e.g. during a tax audit or trial),
- reducing the time and money spent by both taxpayers and tax administrations on verifying transfer pricing. This is because the tax authorities, when starting the APA procedure, have a lot of information about the taxpayer,
- bilateral and multilateral APAs significantly reduce or completely eliminate the risk of double taxation in relation to the subject transaction covered by the agreement,
- carrying out the advance pricing agreement procedure allows tax administration representatives to acquire specific knowledge and skills relating to certain sectors or specific types of transactions. As a result, they will be able to better serve other taxpayers in a similar situation to the taxpayer applying for an APA.
Negative parties to the conclusion of an advance pricing agreement:
- concluding a unilateral APA does not eliminate the risk of double taxation, and additional problems may arise when the tax administration of the other country to which the transaction covered by the unilateral agreement relates does not want to accept its provisions,
- too much flexibility in the APA may lead the taxpayer and its affiliate to adjust its valuation to the range allowed in the APA. Therefore, it is important that in a unilateral APA this flexibility complies with the free market principle, as otherwise foreign tax authorities will not be willing to allow a codependent adjustment resulting from an APA,
- where entities belonging to a multinational group have already concluded a number of bilateral pricing agreements, there may be a dangerous tendency to conclude later APAs in a manner similar to the earlier ones, without sufficient consideration of other market conditions and conditions at different times.
- the conclusion of an APA may entail providing the tax administration with more detailed information about the taxpayer and its business than would be required by a regular transfer pricing survey. In principle, such a situation should not take place, as the documentation required for an APA should not be more burdensome than that provided during the transfer pricing control (apart from the preparation of a detailed forecast as to the assumed terms of the future transaction),
- once a pricing agreement with the taxpayer is not concluded, the tax administration may feel encouraged to conduct an inspection with the taxpayer. This is the case, inter alia, because the methodology proposed by the taxpayer has not been approved, and the tax administration itself has exhaustive documents regarding the taxpayer before the initiation of the audit,
- the price paid for the preparation and signing of an APA is relatively high, which means that not all taxpayers can afford to submit an application for an APA.
Date and fee
The APA can be concluded for any period, but not longer than 5 years. After this period, you can apply for a renewal of the agreement.
Depending on the type of agreement, a different application fee applies, in the event of an agreement:
– domestic entities fee: PLN 5,000 – PLN 50,000,
– foreign entity fee: PLN 20,000 – PLN 100,000.
– fee: PLN 50,000 – PLN 200,000.
– fee: PLN 50,000 – PLN 200,000.
In summary, advance pricing agreements can be a useful tool for minimizing tax risk. They enable better planning of future burdens, and also allow the taxpayer to avoid uncertainty as to the correctness of the transfer valuation method used by him. However, APAs are not free from drawbacks, the greatest of which are the cost of concluding the agreement and the length of the procedure itself. Therefore, each taxpayer should consider for himself whether, in his case, the advantages of advance pricing agreements outweigh the disadvantages.
1 Prepared on the basis of: OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, chap. IV, Paris 2010.