Transfer pricing

Guidelines for APA


In October 1999, the OECD published an update to the1995 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter referred to as the "Guidelines"). This update is in the form of a new Annex to the Guidelines that 91ides guidance on conducting advance pricing arrangements under the mutual agreement procedure (MAP APAs). The Annex becomes an integral part of the Guidelines as shown by the decision of the OECD council on 28 October to amend its original recommendation concerning the Guidelines in 1995 so as to incorporate the new guidance in this Annex. It therefore has the same status as the existing eight Chapters of the Guidelines.

An APA is an administrative approach that attempts to prevent transfer pricing disputes from arising by determining criteria for applying the arm's length principle to transactions in advance of those transactions taking place. This contrasts with traditional audit techniques that look to whether transactions, which have already taken place, reflect the application of the arm's length principle. Such approaches were relatively novel at the time the 1995 Guidelines were adopted by the OECD Council and so the Committee on Fiscal Affairs stated at paragraph 4.161 of the Transfer Pricing Guidelines that it intended "to monitor carefully any expanded use of APAs and to promote greater consistency in practice amongst those countries that choose to use them." Further, it is stated at 4.163 of the Guidelines that, "wherever possible, an APA should be concluded on a bilateral or multilateral basis between competent authorities through the mutual agreement procedure of the relevant treaty."

The publication of this Annex is intended as a response to both the above recommendations and is also intended to make the MAP APA process more transparent, more efficient and produce more consistent results. Further, publication should help the efforts of the Committee on Fiscal Affairs to associate non-member Countries with the 1995 Guidelines, since the guidance is intended for use by those countries - both OECD Members and non-members - that wish to use APAs.

The Annex starts off by defining the different types of APA and outlines the objectives of the APA process. The eligibility for entering into a MAP APA is examined in relation to treaty issues and to other factors such as the audit status of the taxpayer. The issues around multilateral APAs (i.e. where there is more than one bilateral mutual agreement) are also discussed. The core of the Annex looks in detail at the whole MAP APA process, starting from pre-filing meetings, moving on to the filing of a proposal, its evaluation by the tax authorities, the discussion and conclusion of the mutual agreement, the implementation of that mutual agreement and finally the monitoring of the agreement and possible renewal. Although the focus of the Annex is on giving guidance to tax authorities, the opportunity is taken to discuss how best the taxpayer can contribute to the process.

An extract of the Annex is reproduced below that discusses the various issues that the taxpayer should consider when making a proposal for a MAP APA. The whole Annex can be purchased from OECD publications.