Transfer pricing: methodologies: Advance Pricing Agreements: what is an APA?
What is an APA and when might a business consider one?
An APA is a written agreement between a business and the Commissioners of HM Revenue & Customs 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.
An APA enables businesses to achieve certainty that the transfer pricing issues covered by the agreement will not be part of any enquiry into their self-assessment tax returns for the relevant period and so provides greater certainty over their tax liabilities. HMRC has also 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.
TIOPA10/S218(2) 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:
- Transfer pricing between separate business enterprises where questions may arise as to the determination of the arm’s length provision under the rules in TIOPA 2010/Part 4.
- 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.)
- Across the UK oil-related ring-fence.
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 although Thin Capitalisation issues will generally be dealt with via a separate Advance Thin Capitalisation Agreement (“ATCA”). 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.
The APA legislation does not specifically provide for a determination that a permanent establishment does not exist; however it may be possible for the APA to include a determination that the income to be attributed to a potential PE is nil. Business International has responsibility for all applications except enterprises operating in the North Sea (for which the Large Business Service’s Oil and Gas Sector is responsible). Otherwise, Business International will involve such specialists and delegated competent authority officials as is necessary, and will ensure the business’ Customer Relationship Manager is involved.
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 INTM422050).