Are APAs the only way to resolve international issues?

In recent years the need for certainty on the tax affairs of a multinational has become a strong preference for both taxpayers and tax authorities alike.

Cross-border cash and asset flows are seen to present a high risk and the scope for non- or double taxation continues to increase as globalisation of business accelerates.

Furthermore, tax has gained high prominence in corporates and has finally made it onto the boardroom agenda.

Whether that is through the efforts of tax administrations such as HMRC, in-house tax staff or just the bottom-line impact of things going wrong is a moot point.

The increasing need for certainty on tax matters also runs parallel to a changing fiscal environment. The popular view that large corporates should act morally by paying the 'right’ amount of tax has been a keen topic in the UK media in past years. Tax authorities have also been keen to promote this concept.

The recent work by the OECD on country-by-country reporting and the 'enhanced relationship' concept we see in the UK are both evidence of this. So the multinational is left in a position where the game of non-taxation is largely a bygone era but the threat of double taxation or non-deductibility of costs is a significant and increasing risk.

The traditional approach

Multinationals have become much better at documenting cross-border transactions as a means to mitigate tax risk. Whilst this can be administratively burdensome, with reports extending up to 300 pages in length, good documentation goes a long way in retaining corporate memory and demonstrating that transfer pricing issues have been well considered.

Furthermore, on audit, a co-operative approach by the taxpayer is more often the norm. If an audit runs well, the taxpayer will guide the relevant tax authority on relevant documentation, rather than sending over boxes of material, inevitably prolonging the audit.

When agreement is not gained on transfer pricing issues with a tax authority, the Mutual Agreement Procedure is available.

However, the question on when to kick this off is one that needs to be carefully considered – if left too long time limits may bar such an application, and prolong the pursuit of certainty on the matter.

The use of advance pricing agreements (APAs) has also been increasing in recent years as a means to mitigate risk. However, this can be a painful and sometimes, very unsatisfactory process.

Aside from the cost to all involved, an APA’s application can be very limited if there is a change circumstances or corporate reorganisation.

An APA is a formal agreement that stands on facts rather than principles of tax law.

Whilst the taxpayer is responsible for initiating the process and providing relevant information, their role is largely passive from there on. There is therefore a certain loss of control – much in the same way as an issue moving to litigation.

Is there a better way?

For a large taxpayer who has a real-time and transparent working relationship with its tax authority, cross-border tax issues will most likely be brought up at an early stage. Ideally the result is that a suitable tax treatment is agreed.

To take that concept one step further, wouldn’t it be a more productive use of time for all if the affected countries and the taxpayer worked together to find a suitable tax treatment? In this scenario the taxpayer is not having two conversations with two tax authorities on the matter, with the risk of one or both failing (and hence creating double taxation).

Therefore subject to a suitable legal framework being available in order to work in such a manner, this concept would work much more on the basis of agreement around principals.

This approach can also be extended to assurance activities.

 For instance, where a multinational allocates costs between countries, the fact that one country has conducted an audit on those charges could provide a good amount of assurance to another country.

The benefits of this way of working should also hold appeal to tax authorities. Assurance will be gained that tax will be paid, and their own audit programme in relation to the taxpayer should be reduced more to country-specific matters. In the increasingly highly cost-constrained environment that tax authorities operate, resources can therefore be more effectively deployed.

Whilst working jointly with fiscal authorities may not hold appeal to some taxpayers, the concept is gaining traction, particularly by tax authorities.

The possibility for EU fiscal authorities working together may be a future reality; perhaps even before we have a Common Consolidated Corporate Tax Base type regime.

Whether that will simply be to conduct joint audits or rather, to assist taxpayers in resolving international issues in a faster and fairer way, is really up to us all to shape.

The end goal should, however, be the elimination of double taxation.
 

Kirsten White, Head of UK Tax, Shell Plc