INTM422090 - Transfer pricing: methodologies: Advance Pricing Agreements: reaching agreement

Reaching agreement

38. An agreement is first reached with the other administration and then the UK business is asked whether they agree to its terms. HMRC will keep the business appraised of progress during the negotiation process with the other tax administration. If the UK business does not agree the terms, then normally the process will be terminated, and negotiations will cease (in exceptional circumstances HMRC may consider changes to the proposed competent authority agreement, but only if the other competent authority is also amenable to revisiting it). If the UK business does agree to the terms, an agreement between HMRC and the business will be made subject to its terms being observed. The terms will include:

  • a commitment from the business to demonstrate adherence to the agreed method for dealing with the transfer pricing issues during the term of the APA in the form of a regular compliance report (an ‘Annual Report’) as required by Section 228 TIOPA 2010
  • the identification of Critical Assumptions bearing materially on the reliability of the method and which, if subject to change, may render the agreement invalid. This will generally include an assumption that the relevant transfer pricing law and OECD Guidelines remain materially the same

39. A sample ‘plain vanilla’ agreement is included as an annex to this Statement Annex 2. Normally the person responsible for signing the agreement on behalf of the business would be the person responsible for signing a tax return, subject to that person having authority within the multinational group to commit the group to the terms of the APA.

40. HMRC aims to complete the APA process as speedily as possible: starting from the date of the formal submission, we target 30 months (but experience shows that for a bilateral or multilateral agreement, it can take 36 months or longer). Once cases go beyond this target, senior members of the BAI team will review the case with a view to progressing it. The time taken is dependent on the complexity of the case and, in the case of bilateral or multilateral applications, may be dependent on the working practice of the administrations in the other country or countries. It is also, of course, dependent on co-operation from the applicant. HMRC may view significant delay on the part of the business as indicative of a lack of co-operation or a loss of interest in agreeing an APA and may then terminate the APA process as a result. Lack of response or active engagement from the other tax administration may also lead to HMRC terminating the process, but not until all reasonable efforts have been made to encourage that administration to progress the case. Whilst the negotiations are ongoing between the two tax administrations, the business must continue filing the tax returns within the prescribed deadlines and observing self-assessment rules.

41. Following a suspension or similar pausing of active progress on the APA for at least six months, HMRC may request that a new application is made should the business want the APA process to continue for periods following the pause. However, the necessity for a new application would be subject to the facts and circumstances of the case, particularly if there were any many major changes to the proposed covered transactions or the business, and following discussions with the business.

42. HMRC expects the business to facilitate an efficient process by providing timeously all the information necessary to consider the application properly and reach agreement. This extends to the enterprise’s co-operation in ensuring that the formal APA agreement and any associated procedural paperwork are finalised shortly after the finalisation of the transfer pricing method and/or, in a bilateral or multilateral process, the concluding of agreements with treaty partners.

43. The tax administrations cannot give effect to, and the enterprise cannot rely upon, the BAPA reached between the Competent Authorities on its case unless, and until, the necessary domestic paperwork has been completed. In the UK domestic agreement between the Commissioners (or their representatives) and the UK persons covered is required by the APA legislation. This domestic agreement should be signed within 60 days of the competent authority mutual agreement being notified to the business. Businesses are encouraged to begin drafting the domestic agreement when the case is heading towards a mutual agreement between the competent authorities.

44. If agreement on the terms of an APA cannot be reached with the other tax administration, HMRC will notify the business of the reasons why. HMRC does not consider it has any obligation to continue discussion beyond the point at which it has determined that agreement cannot be reached.

45. A business may withdraw an APA request at any time before final agreement is reached.

46. HMRC, and generally its treaty partners, will expect the actual pricing of the transactions covered by an APA to be consistent with the transfer pricing methodology and terms defined within it. Adjustments arising within the tax computation are expected to also be made in the accounts, thereby ensuring the economic and tax position of the arm’s length price is aligned. HMRC expects that the tax computation will be prepared based on the position put forward in the APA application, until such time that the APA is concluded and any variation from the proposed pricing is known.