Much has been written about the advantages of APAs. They provide certainty about the appropriate recognition of taxable income in each jurisdiction and thus, the risk of adjustment is decreased.
An APA also provides a strong argument to other Revenue authorities of the appropriateness of the methodology in other jurisdictions. Before embarking on one, also consider the practicalities and cost of an APA. Prior to negotiation, thought should be given to:
human resources (during negotiations and compliance);
cost benefit (internal/external cost of time, filing fees);
systems requirements;
implementation;
appropriateness (complex transaction);
stable or continuously changing business; and
involvement in negotiation to move process forward.
Companies should take into account whether they have adequate human resources, not only in the tax department, but also in finance to cope with the requests for substantial financial and non-financial information prior to negotiation, during the negotiation, and on an annual basis.
If the APA-covered business is part of many divisions of the company, this could potentially increase the number of finance staff exponentially. On top of the internal resource cost, there is also the cost of advisers, third party comparable studies, system updates, and possibly filing fees.
However, one might argue that these are normal costs that must be incurred to adequately prepare transfer pricing documentation and it is better to incur the cost up front, rather than to risk a potential large future adjustment, interest, and penalties. Information required annually typically includes revenue, expense, headcount, and compensation for the covered business.
If a company does not already have the ability to segment this information and download it from their systems automatically, consideration should be given as to whether more robust systems and segmented inter-company accounts should be developed.
A company should also contemplate whether the fundamentals of the proposed covered business, such as the business activities, functions performed, assets employed, and risks assumed are continuously changing. If they are, it might not make sense to enter into an APA.
To keep negotiations on track and to reach a timely conclusion, especially in bilateral and multilateral cases, it is recommended that the tax team in one country is chosen to take the lead to proactively progress the negotiations, prepare responses and organise meetings. However, in some countries, negotiations might not pass the first month if the transactions are not deemed to be complex enough.
So now you’ve considered the practicalities and cost, is an APA right for your company?
Michele Young, transfer pricing tax manager, JP Morgan
Much has been written about the advantages of APAs. They provide certainty about the appropriate recognition of taxable income in each jurisdiction and thus, the risk of adjustment is decreased.
An APA also provides a strong argument to other Revenue authorities of the appropriateness of the methodology in other jurisdictions. Before embarking on one, also consider the practicalities and cost of an APA. Prior to negotiation, thought should be given to:
human resources (during negotiations and compliance);
cost benefit (internal/external cost of time, filing fees);
systems requirements;
implementation;
appropriateness (complex transaction);
stable or continuously changing business; and
involvement in negotiation to move process forward.
Companies should take into account whether they have adequate human resources, not only in the tax department, but also in finance to cope with the requests for substantial financial and non-financial information prior to negotiation, during the negotiation, and on an annual basis.
If the APA-covered business is part of many divisions of the company, this could potentially increase the number of finance staff exponentially. On top of the internal resource cost, there is also the cost of advisers, third party comparable studies, system updates, and possibly filing fees.
However, one might argue that these are normal costs that must be incurred to adequately prepare transfer pricing documentation and it is better to incur the cost up front, rather than to risk a potential large future adjustment, interest, and penalties. Information required annually typically includes revenue, expense, headcount, and compensation for the covered business.
If a company does not already have the ability to segment this information and download it from their systems automatically, consideration should be given as to whether more robust systems and segmented inter-company accounts should be developed.
A company should also contemplate whether the fundamentals of the proposed covered business, such as the business activities, functions performed, assets employed, and risks assumed are continuously changing. If they are, it might not make sense to enter into an APA.
To keep negotiations on track and to reach a timely conclusion, especially in bilateral and multilateral cases, it is recommended that the tax team in one country is chosen to take the lead to proactively progress the negotiations, prepare responses and organise meetings. However, in some countries, negotiations might not pass the first month if the transactions are not deemed to be complex enough.
So now you’ve considered the practicalities and cost, is an APA right for your company?
Michele Young, transfer pricing tax manager, JP Morgan
