Bilateral Advance Pricing Agreements
Typically, a bilateral APA is a binding agreement between two tax administrations and the taxpayers concerned. This agreement is concluded by referring to the corresponding double taxation agreement. It regulates the tax treatment of future transactions between related subjects. A Pre-Pricing Agreement (APA) is an agreement between tax authorities and taxpayers on the future implementation of transfer pricing policies. An APA can be an effective measure to reduce transfer pricing risks for many tax payers, ensuring that the level of future profitability is accepted as appropriate by the tax authorities. Download our transfer pricing brochure for details The appendix begins with the definition of the different types of APA and describes the objectives of the APA process. The ability to participate in an APA MAP is considered with respect to contractual issues and other factors such as the audit status of the subject. Issues relating to multilateral GPAs (i.e., where there is more than one bilateral agreement) are also addressed. The central point of the annex deals in detail with the whole MAP-APA procedure, starting with the meetings before the presentation, on the presentation of a proposal, its evaluation by the tax authorities, the discussion and conclusion of the mutual agreement, the implementation of this mutual agreement and, finally, the follow-up of the agreement and a possible extension. While the Schedule focuses on the direction of tax authorities, it takes the opportunity to discuss how the taxpayer can best contribute to this process.
In October 1999, the OECD published an update of the OECD guidelines on clearing prices for multinational companies and tax administrations in 1995 (the so-called “guidelines”). This update takes the form of a new schedule to the guidelines, which contains guidelines for the implementation of ex ante price agreements as part of the Mutual Agreement Procedure (MAP-APAs). The annex is an integral part of the guidelines, as evidenced by the OECD Council`s decision of 28 October to amend its original recommendation on the 1995 guidelines to include the new guidelines in this annex. It therefore has the same status as the eight existing chapters of the guidelines. An APA is an administrative approach that aims to avoid transfer pricing disputes by establishing criteria for applying the arm length principle to transactions prior to such transactions. This contrasts with traditional audit techniques that verify whether transactions that have already taken place reflect the application of the arm length principle. Such approaches were relatively new at the time the 1995 OECD Council adopted the guidelines, and the tax committee therefore indicated, in point 4.161 of the transfer pricing guidelines, that it intended to “carefully monitor any extensive use of the APA and promote greater consistency in practice among countries that choose to use them.” In addition, point 4.163 of the guidelines states that “if possible, an APA must be concluded on a bilateral or multilateral basis between the relevant authorities as part of the treaty`s mutual agreement procedure.” A pre-price agreement (APA) is a prior agreement between a tax payer and a tax authority on an appropriate transfer pricing method (TPM) for a number of transactions involved during a specified period (“covered transactions”).