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INTERNATIONAL TAX – ADVANCED PRICING AGREEMENTS
Our firm has international related party dealings – how do we mitigate the risk of a transfer pricing review/audit?
A product that many revenue authorities offer to taxpayers that have international related party dealings is an Advance Pricing Arrangement (APA).
An APA is an agreement between the taxpayer and the revenue authority to provide taxpayers with an agreement on the future application of the arm’s length principle to be applied to international related party dealings (IRPDs). An APA is a prospective arrangement (generally for a period of five years) negotiated in a cooperative environment.
The policy and process of the Australian Taxation Office (ATO) APA Program is outlined in Practice Statement Law Administration PS LA 2015/4.
The benefits of an APA include:
- Providing certainty on an appropriate transfer pricing methodology
- Limiting the prospect of a transfer pricing review/audit
- Eliminates or substantially reduces the risk of double taxation
- Reduces the cost of compliance
- Reduces the record keeping burden
As stated above, the APA process is carried out in a cooperative environment giving rise to mutual expectations for both parties. Depending on the value and complexity of the IRPDs, the ATO expect that any documents requested be provided in a timely manner and any key taxpayer employees be available for interview. The ATO will carry out a robust and holistic level review and examine the global value chain relating to the IRPDs and the business in general.
Taxpayers may be concerned about locking themselves into an agreement where events may occur that are so significant, it would be difficult to achieve an arm’s length return (an example being where products are not able to be purchased from an overseas related party due to an earthquake or flood restricting the manufacture of said products). In order to protect taxpayers from these types of events, critical assumptions are included in the APA where if an event occurs, the terms of the APA either do not apply or a renegotiation takes place.
Deayton Tax Consulting can assist tax professionals and taxpayers in deciding whether to enter into an APA and what to encounter if entering into an APA.
International Tax – ADVANCED PRICING AGREEMENTS
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