Transfer Pricing Insights

New APA guidance to limit “surprises”

2015-08-06

On 23 July 2015, the Australian Taxation Office (ATO) released a Practice Statement Law Administration: PS LA 2015/4 which provides guidance for ATO staff on advance pricing arrangements (APAs) and primarily focusses on cross-border dealings between related entities.

PS LA 2015/4 outlines a three-step process for APAs which will replace the former five-step model (PS LA 2011/1). The new streamlined process has a greater focus on the early engagement phase and aims to identify all of the key issues upfront to improve timelines and minimise “surprises”.

What is an APA?

An advance pricing arrangement or APA, is an ahead of time agreement between a taxpayer and at least one revenue authority specifying the transfer pricing methodology for a set of transactions over a fixed period usually between three and five years.

Who would consider an APA?

APAs can be unilateral, which involves a business in Australia and the ATO, bilateral or multilateral, which involves an agreement between two or more tax administrations and respective taxpayers.

APAs are commonly used by multinational groups to pre-determine the pricing of their cross-border transactions to achieve tax certainty for a fixed period of time.

In addition, APA programs yield the following benefits for multinational enterprises:

  • Better control of the information flow in relation to costs, expenses and tax liabilities
  • Eliminate or substantially reduce the risk of double taxation
  • Maintain a partnership approach throughout the process with revenue authorities
  • Decrease the annual compliance burden - taxpayers with APAs only need to fill out a brief report each year.

As such, the ATO continues to take an encouraging view to dealing with APAs with taxpayers.

What are the changes under the new guidance?

Under the new guidance, the most significant change is the expanded scope in the pre-lodgement process, referred to as the “early engagement” phase.

This phase now includes three important steps:

  1. Triage – the purpose of which is to identify the “showstopper” risks and assist the APA Program Management Unit (PMU) in determining whether an APA request can and should proceed further.
  2. Preliminary discussions – which are held with the taxpayer to explore avenues for the appropriate treatment of the covered cross-border transactions and any collateral issues. During this step, the scope, classification (unilateral, bilateral or multilateral), method and collateral issues will be confirmed.
  3. Review workshop – the purpose of which is to assist the APA team leader to make a decision on whether the taxpayer will be invited to lodge a formal APA application.

APA process

Who will be impacted by the new guidance?

Under the new guidance, the eligibility for entering into an APA will become more stringent which will impact all APA requests.

Multinational groups will have a higher chance of entering into an APA if they:

  • Demonstrate that existing cross-border transactions that are unlikely to change significantly
  • Consider cross-border arrangements in the future that are unlikely to change significantly
  • Demonstrate transfer pricing issues that are material and complex (rather than simple or routine)
  • Demonstrate a higher probability of double taxation without an APA.

What taxpayers should consider when contemplating an APA?

Early preparation - It is critical for taxpayers to ensure sufficient documentation and agreements are in place to support the covered transactions. These documents should demonstrate both the pricing and commerciality of transactions are reasonable, and the ATO expects transparency of all relevant and material facts and information.

Holistic thinking - The “whole of code” principle adopted by the ATO means that a significantly broader coverage of information will be subject to scrutiny, including the global value chain, IP allocation and relevant collateral issues arising from the cross-border arrangements.

Cooperation - Taxpayers should co-operate fully with relevant stakeholders from the revenue authorities, including undertaking open and ongoing dialogue in the development of an APA. This will help facilitate the APA to progress in a timely fashion.

ShineWing Australia has experience in assisting multinational enterprises in negotiating and implementing the terms of unilateral and multilateral APA agreements.

If you have any queries in relation to APAs, please contact our transfer pricing specialist, Yang Shi, Senior Transfer Pricing Manager on +61 3 8538 2217 or [email protected] or your ShineWing Australia relationship partner.