Benefits of APAs Outweigh Costs
Many companies are entering formal Advance Pricing Arrangements (APAs) with one or more tax authorities to mitigate the risks of new tax regulations as tax authorities are increasing their transfer pricing audit activities to ensure that they are staking their claim to taxable profits—and the amounts of tax at stake can be material.
A new survey released by KPMG International, titled Navigating APAs, shows that respondents believe the stability and security of knowing how their transfer pricing will be treated clearly offsets the concerns about the time and expense involved in pursuing an APA. Through an APA respondents also indicated they are better able to manage internal resources and save time and costs by preventing future audits.
“APAs offer security that the tax authorities will accept your transfer pricing methodology over the term of the agreement,” says Sean Foley, KPMG’s Head of Global Transfer Pricing Services. “To ensure APA programs keep attracting companies that want the security of an APA at a reasonable cost and speed, the introduction of a simplified, expedited and risk-based process will be critical.”
To explore the current perceptions and experiences with APA programs globally, in-depth interviews were conducted with tax directors (or their equivalents) from 25 multinational companies in seven countries. The findings were reviewed and analyzed by a panel of Transfer Pricing Leaders from KPMG member firms. This survey is the result of their considerable collective experience in dealing with APA programs and shares insights on how policy makers can improve the efficiency and effectiveness of transfer pricing compliance and dispute prevention systems.
According to the survey, with more control over the timing of the APA process compared to an audit, respondents were better able to manage their workflows and internal resources.
Some respondents saw value in the opportunity to improve their relationships with the tax authorities and to help them understand their business model over the course of the negotiations. Successful APAs can also serve as precedents to support the company’s transfer pricing in other jurisdictions.
“Over the past 20 years, APAs have become well-established tools for risk management and advance compliance,” says François Vincent, KPMG’s Leader, Global Transfer Pricing Dispute Resolution. “Experience shows that once a company goes through the process and sees the benefits, many will do it again – albeit the right situation.”
Negotiating an APA may consume a lot of time and resources. While completion times vary by country, the average time to process and complete APAs typically runs from 10 to 20 months.
With more countries adopting APA programs, most respondents expect that taxpayer demand for APAs will increase in the near term, but they worry that tax authorities will not have the resources to keep up with the increased demand. Some predict increase in demand for APAs will slow down the process even more and cause a drop in the number of files accepted into the program. Others suggest that the rising caseload will prompt tax authorities to introduce a streamlined, expedited APA process.
In the survey, KPMG’s transfer pricing professionals make a case for an expedited, fast-track APA process that could be a win-win for tax authorities and taxpayers alike by reducing risks and increasing the efficiency of administration.
For example, the Australian Taxation Office (ATO) has introduced separate APA products for taxpayers based on three levels of risk and complexity: simplified, standard, and complex. This allows the ATO to focus its resources on areas of higher risk and complexity while simplifying requirements for straightforward, lower-risk transactions.
In addition, the Organisation for Economic Co-operation and Development (OECD) is reviewing transfer pricing administration with an eye to simplifying it.
“KPMG’s Global Transfer Pricing Services practice has submitted comments calling on the OECD to consider the benefits of incorporating a process for expedited APAs into the OECD’s transfer pricing guidelines,” says Foley.
“The results of this survey support the view that tax authorities should adopt expedited APA processes to supplement existing programs. Doing so could boost participation and increase the efficiency of transfer pricing administrations, for the benefit of all concerned.”