The tax and in particular the transfer pricing arrangements of multinationals is currently under the spotlight both internationally, through the OECD/G20 BEPS project, and domestically in Australia, by way of the Senate inquiry into corporate tax avoidance. This has resulted in new legal measures being adopted (such as the DPT in the United Kingdom, and Australia's de-facto version thereof) and increased enforcement efforts by tax administrations worldwide, particularly with respect to transfer pricing. In these uncertain times multinationals globally are seeking certainty concerning their tax affairs wherever available. Advance Pricing Arrangements (APAs), where available and appropriate, can provide multinationals with the ultimate certainty concerning their transfer pricing arrangements.
Following recent amendments to the Australian transfer pricing legislation and the establishment of a new APA/MAP program management unit within the Australian Taxation Office (ATO), on 24 July 2015, the ATO published a new practice statement (PS) on APAs (PS LA 2015/4). This new PS provides guidance to ATO staff on APAs, including mutual expectations, when the ATO is likely to enter into an APA or not, the process to be followed and so forth. It replaces the former practice statement, PS LA 2011/1, and reflects, according to the ATO; (a) a principle-based approach, (b) streamlined process and practices to improve timeliness and (c) reduction of red tape.
Set out below is a summary of the key features of the new PS (PS LA 2015/4), with comparisons to the previous PS (PS LA 2011/1) where applicable. In addition, Appendix 1 outlines key APA statistics recently published by the ATO for 2015 (as at 30 June).
Availability of APAs
The new PS covers unilateral, bilateral and multilateral APAs, and , while it deals primarily with APA requests covering cross border dealings between separate enterprises, the PS does note that same principles are to be applied to requests for APAs covering the attribution of profits to permanent establishments.
Unlike the previous PS, which detailed three different types of APA products ('simplified', 'standard' and 'complex'), the new PS does not distinguish between different types of APA products. Rather, the new PS sets out when the ATO is more likely to enter into an APA and when it is less likely to do so, indicating that APAs are more likely to be available where the issues are complex and there is uncertainty as to how the transfer pricing rules apply, and not where the case is routine and the arm's length conditions are relatively certain or unlikely to change significantly during the period of the of APA. Furthermore, the new PS notes that where the value of cross border deals is not material, the ATO will also be less likely to enter into an APA. This change in approach appears to reflect fundamental shift in the focus of the ATO's APA program toward complex and high value cases, which is reflected in the reputed increase in the number of bilateral and multilateral APAs being processed as at 30 June 2015, vis-à-vis unilateral APAs (see Appendix 1).
Three stage process
In contrast to the five step process detailed in the previous PS, the new PS sets out a three stage APA process, with a strong emphasis on the first stage - early engagement.
- Stage 1 - early engagement - This first stage comprises three distinct steps: triage, preliminary discussions and APA request review workshop. The process places strong emphasis on building a cooperative relationship and ensuring alignment of expectations from the outset. Whilst taxpayers can make an informal request via email or letter, the ATO has published "request for advance pricing agreement early engagement" form, which is its preferred method.
- Stage 2 - APA application - This stage commences once the (invited) taxpayer lodges a formal APA application and comprises of three steps (analysis and evaluation, negotiation and agreement). During this stage the APA team will critically analyse and evaluate the application and supporting information and make enquiries, where necessary. Where the APA team does not agree with the contentions in the application, the team will negotiate with the taxpayer with a view to reaching agreement on the functional analysis, comparability set and arm's length outcome. If agreement is not possible in a reasonable timeframe, the ATO will withdraw from the negotiation. In the case of a bilateral or multilateral APA, the Australian CA will negotiate with the CA of the relevant tax treaty partner(s).
Where agreement cannot be reached, the new PS makes it clear that the ATO can use factual information obtained during the APA process in subsequent enquiries, but not non-factual information (opinions, lines of arguments, judgements or conclusions).
- Stage 3 - monitoring and compliance - Taxpayers are required, under the terms of the APA, to prepare and lodge an annual compliance report (ACR) which details the actuals results for the year and demonstrates compliance with the terms of the APA.
In so far as timing is concerned, the end-to-end process map included as an attachment to the new PS indicates that stage one should take a maximum of six months, and stage two a maximum of 18 months.
Protection afforded by an APA
Consistent with the previous PS and international practice, an APA does not preclude a taxpayer from a risk review of its business overall. However, aside from the annual compliance process (review of the ACR), the ATO will not undertake active compliance in relation to the dealings that are the subject of an APA unless it has reason to believe the taxpayer provided incorrect information. Where an APA does become part of the focus of a risk review or audit, this will be limited to checking compliance with the terms of the APA, ensuring the agreed transfer pricing method was applied properly and that the APA application and associated documentation reflect the facts.
Contrary to the practice in some other jurisdictions, the new PS states that ATO staff are, generally, not to discontinue or postpone a compliance activity where the taxpayer applies for an APA in respect of subsequent income years. However, where the parties agree that the APA will assist in resolving these issues, the risk review or audit may be to deferred or discontinued.
The new PS notes that whilst a renewal request must go through the same stages as a new APA request, the APA team are, where appropriate, to streamline the process so as to reduce the time involved and documentation provided. Cases where it may be appropriate to streamline include; where there has been no material changes to the covered cross border dealings or the role of the Australian entity(ies) in the global value chain; there are no proposed changes to the terms of the APA; and, where it is unlikely that there will be material changes to the dealings over the proposed period of the renewed APA.
Cancellation and revision of APAs
The new PS makes clear that, despite the cooperative environment that is conducive to an APA being agreed, in some rare cases taxpayers may omit or provide incorrect information. In cases where ATO staff have reason to believe that information provided or statements made were false or misleading, or information was omitted that makes other information or statements false or misleading, then the APA will be reviewed with a view to determining whether it should be revised or cancelled.
In Australia as well as globally, the uncertainty and lack of predictability in the current tax environment make APAs an attractive opportunity for taxpayers to obtain certainty and manage risk in relation to the future treatment of their cross-border related party transactions.
Drawing on its global network of tax and transfer pricing professionals with experience in both public and private sector on APAs, DLA Piper is well positioned to provide assistance to clients looking to obtain APAs in Australia and elsewhere.
For more information please contact the authors.
Australian Taxation Office APA Statistics by Income Year (as at 30 June) [source]
Click here to view table.