Tag: Advance pricing arrangement (APA)

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 advance pricing arrangement may be unilateral involving one tax administration and a taxpayer or multilateral involving the agreement of two or more tax administrations.

Germany vs "H-Customs GmbH", May 2022, Bundesfinanzhof, Case No VII R 2/19

Germany vs “H-Customs GmbH”, May 2022, Bundesfinanzhof, Case No VII R 2/19

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 ... Read more
OECD Publishes Manual on Bilateral Advance Pricing Arrangement

OECD Publishes Manual on Bilateral Advance Pricing Arrangement

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 ... Read more
US vs Eaton Corp., August 2022, Sixth Circuit, Nos. 21-1569/2674

US vs Eaton Corp., August 2022, Sixth Circuit, Nos. 21-1569/2674

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 ... Read more

TPG2022 Chapter VI Annex II – Hard To Value Intangibles – 3. Dispute prevention and resolution

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 ... Read more

TPG2022 Chapter IV paragraph 4.176

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 ... Read more

TPG2022 Chapter IV paragraph 4.175

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 ... Read more

TPG2022 Chapter IV paragraph 4.174

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 ... Read more

TPG2022 Chapter IV paragraph 4.173

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 ... Read more

TPG2022 Chapter IV paragraph 4.172

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 ... Read more

TPG2022 Chapter IV paragraph 4.171

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 ... Read more

TPG2022 Chapter IV paragraph 4.170

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 ... Read more

TPG2022 Chapter IV paragraph 4.169

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 ... Read more

TPG2022 Chapter IV paragraph 4.168

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 ... Read more

TPG2022 Chapter IV paragraph 4.167

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 ... Read more

TPG2022 Chapter IV paragraph 4.166

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 ... Read more

TPG2022 Chapter IV paragraph 4.165

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 ... Read more

TPG2022 Chapter IV paragraph 4.164

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 ... Read more

TPG2022 Chapter IV paragraph 4.163

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 ... Read more

TPG2022 Chapter IV paragraph 4.162

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 ... Read more

TPG2022 Chapter IV paragraph 4.161

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 ... Read more

TPG2022 Chapter IV paragraph 4.160

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 ... Read more

TPG2022 Chapter IV paragraph 4.159

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 ... Read more

TPG2022 Chapter IV paragraph 4.158

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 ... Read more

TPG2022 Chapter IV paragraph 4.157

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 ... Read more

TPG2022 Chapter IV paragraph 4.156

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 ... Read more

TPG2022 Chapter IV paragraph 4.155

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 ... Read more

TPG2022 Chapter IV paragraph 4.154

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 ... Read more

TPG2022 Chapter IV paragraph 4.153

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 ... Read more

TPG2022 Chapter IV paragraph 4.152

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 ... Read more

TPG2022 Chapter IV paragraph 4.151

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 ... Read more

TPG2022 Chapter IV paragraph 4.150

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 ... Read more

TPG2022 Chapter IV paragraph 4.149

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 ... Read more

TPG2022 Chapter IV paragraph 4.148

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 ... Read more

TPG2022 Chapter IV paragraph 4.147

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 ... Read more

TPG2022 Chapter IV paragraph 4.146

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 ... Read more

TPG2022 Chapter IV paragraph 4.145

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 ... Read more

TPG2022 Chapter IV paragraph 4.144

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 ... Read more

TPG2022 Chapter IV paragraph 4.143

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 ... Read more

TPG2022 Chapter IV paragraph 4.142

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 ... Read more

TPG2022 Chapter IV paragraph 4.141

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 ... Read more

TPG2022 Chapter IV paragraph 4.140

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 ... Read more

TPG2022 Chapter IV paragraph 4.139

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) ... Read more

TPG2022 Chapter IV paragraph 4.138

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 ... Read more

TPG2022 Chapter IV paragraph 4.137

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 ... Read more

TPG2022 Chapter IV paragraph 4.136

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) ... Read more

TPG2022 Chapter IV paragraph 4.135

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 ... Read more

TPG2022 Chapter IV paragraph 4.134

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 ... Read more
Poland vs R. Sp. z o. o., January 2022, Supreme Administrative Court, Case No II FSK 990/19

Poland vs R. Sp. z o. o., January 2022, Supreme Administrative Court, Case No II FSK 990/19

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 ... Read more
Finland vs A Oy, June 2021, Supreme Administrative Court, Case No. KHO:2021:73

Finland vs A Oy, June 2021, Supreme Administrative Court, Case No. KHO:2021:73

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 ... Read more
OECD Guidance on the transfer pricing implications of the COVID-19 pandemic

OECD Guidance on the transfer pricing implications of the COVID-19 pandemic

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 ... Read more