Advance Pricing Agreements or Arrangements (APAs)
Tax authorities in most major countries have established mechanisms through which taxpayers and governments can agree on the method to be used for determining or testing prices in related-party transactions. Such agreements are known as Advance Pricing Agreements or Advance Pricing Arrangements (APAs).
An APA is an arrangement under which a taxpayer and one or more governments agree on the transfer pricing methodology to be used for testing related-party prices. The purpose of an APA is to establish an agreed method for examining transfer prices for specified transactions.
Basis of an APA
APAs are generally based on transfer pricing documentation prepared by the taxpayer. The taxpayer prepares relevant documentation and presents it to the concerned tax authority or authorities.
The documentation provides the basis for examining the related-party transactions and determining the appropriate transfer pricing methodology. The taxpayer and the government then agree on the method that will be used to test the transfer prices.
Unilateral and Multilateral Agreements
Advance Pricing Agreements may involve a taxpayer and a single government or may involve more than one government.
A unilateral APA involves an agreement relating to a taxpayer and one tax administration. In comparison, a multilateral APA involves more than one government.
Multilateral agreements require negotiations between the governments involved. These negotiations are conducted through the governments’ designated Competent Authority Groups.
Thus, where related-party transactions affect more than one tax jurisdiction, the concerned governments may negotiate through their competent authorities to agree on the transfer pricing methodology.
Duration and Retroactive Effect of APAs
Advance Pricing Agreements are generally entered into for a specified period of several years. The agreed transfer pricing methodology is applied for the period covered by the APA.
In certain cases, an APA may also have a retroactive effect. This means that the agreed transfer pricing approach may be applied to earlier periods, depending on the applicable rules and terms of the arrangement.
Confidentiality of APAs
Most Advance Pricing Agreements are not subject to public disclosure requirements. Therefore, the details of such agreements are generally not made publicly available.
The confidentiality of APA information depends on the applicable tax and disclosure rules of the concerned jurisdiction.
Commencement of APA Proceedings
The rules governing how and when a taxpayer or tax authority may begin APA proceedings differ from one jurisdiction to another.
Therefore, there is no single uniform procedure for commencing an APA in all countries. Taxpayers must follow the specific rules and procedures prescribed by the relevant tax jurisdiction.
Key Exam Points
An Advance Pricing Agreement or Arrangement (APA) is an agreement between a taxpayer and one or more governments regarding the methodology used to test related-party prices.
APAs are generally based on transfer pricing documentation prepared by the taxpayer and submitted to the government.
A unilateral APA involves one tax administration, while a multilateral APA involves more than one government.
Multilateral APAs require negotiations between governments through their designated Competent Authority Groups.
APAs generally apply for a period of several years and may have retroactive effect.
Most APAs are not subject to public disclosure requirements.
The procedure for commencing APA proceedings varies from one jurisdiction to another.