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HMRC internal manual

International Manual

Transfer pricing: methodologies: Advance Pricing Agreements: what is an APA?

APAs - WHAT ARE THEY AND WHEN MIGHT BUSINESSES CONSIDER ONE?

  1. An APA is a written agreement between a business and the Commissioners of HMRC which determines a method for resolving transfer pricing issues in advance of a return being made. When the terms of the agreement are complied with, it provides assurance to the business that the treatment of those transfer pricing issues will be accepted by HMRC for the period covered by the agreement. A bilateral APA - as discussed below - will provide a similar assurance in respect of the tax administration (“Administration”) dealing with the entity at the other end of the transaction.
     
  2. HMRC has found that where there is considerable difficulty or doubt in determining the method by which the arm’s length principle should be applied, the transfer pricing issues can be more efficiently dealt with in real time as they arise rather than retrospectively years later when, for example, key personnel in the business may have moved on.
     
  3. Sub-section 218(2), TIOPA 2010, sets out the transfer pricing issues which can be the subject matter of an APA. An APA can be used to resolve questions relating to the following broad situations giving rise to transfer pricing issues:
     
    1. Transfer pricing between separate business enterprises where questions may arise as to the determination of the arm’s length provision under the rules in Part 4 TIOPA 2010.
       
    2. Attribution of income or profit between parts of a business enterprise which operates in more than one country where questions may arise as to the taxable income to be recognised in any such part. (Note - this is conceptually a similar problem to transfer pricing and any references to “transfer pricing issues” in the remainder of this document should be read as including such attribution issues.)
       
    3. Across the UK oil-related ring-fence.
       
  4. The potential scope of an APA is flexible. It may relate to all the transfer pricing issues of the business or be limited to one or more specific issues.  There is no requirement that the commencement of an APA should coincide with the commencement of the arrangements which it addresses so it may apply to pre-existing issues.
     
  5. The APA legislation does not provide for a determination that a permanent establishment (“PE”) does or does not exist. The determination of profits to be attributed to any PE will only be considered for inclusion in an APA once the existence of the PE through which a company has been, or is proposing to, carry on a trade in the UK is established.
     
  6. Similarly the APA legislation also does not provide for a determination of the potential impact of the Diverted Profits Tax (DPT) or other legislation on the covered transactions.  The interactions between DPT and APAs are discussed in Chapter 3 of the DPT Guidance - https://www.gov.uk/government/publications/diverted-profits-tax-guidance.
     
  7. HMRC’s CT International & Stamps Directorate (“CTIS”) has responsibility for all applications. It will involve such specialists and delegated Competent Authority officials as are necessary, and will ensure the business’ Customer Relationship Manager (“CRM”) is involved.
     
  8. HMRC do not levy any charge on the business for their assistance during the APA process but potential applicants need to be aware that some other Administrations may do. HMRC can advise on this at the Expression of Interest stage (see below).