We have gathered feedback from the tax authorities of various key countries to find out the specifics about their APA programs. Read the following Q&A interview on the topic of APAs in the United Kingdom with the HMRC.
Q: What are, in your view, the main achievements of your APA program?
A: HMRC has had APA legislation in place since 1999. During that time HMRC’s APA program has had a number of achievements:
- HMRC has a reputation for maintaining the arm’s length standard. Working collaboratively with treaty partners and taxpayers on difficult or complex transfer pricing issues, HMRC is able to reach a good position for both the UK exchequer and the taxpayer while applying the arm’s length standard.
- The majority of APA applications to HMRC have been seen through to agreement and the time taken to reach agreement is reasonable. Where taxpayers have withdrawn from the APA program this is generally due to business reasons, not because the two administrations or HMRC/business have not been able to reach an agreement.
- The breadth of the APA program is very wide in terms of the number of different countries that HMRC is negotiating with. The breadth of the program is increasing as the number of countries that have APA programs increases.
Issues and challenges
Q: What are the main challenges facing your APA program?
- The wide range of countries that HMRC deals with brings its own challenges. Where a country’s rules differ from the OECD Guidelines, the areas of concern can be different for each tax authority and it can take more time to reach agreement.
- HMRC has limited resources. Given the number of different tax authorities that HMRC is dealing with at any one time, it is difficult to create a fixed timetable for each case. Demand for APAs is driven by business which limits the ability of HMRC to predict work flows; if HMRC receives a number of applications or information on a number of its cases at the same time, this may impact HMRC’s response time.
- The UK is becoming more competitive and attractive to inward investors. This is causing an increase in APA applications. If this continues, it will present a challenge but HMRC is committed to resourcing this work.
Q: Are there particular substantive issues (for instance, marketing intangibles or buy-ins for cost-sharing arrangements, etc.) that have been more difficult to deal with?
- Given the diverse nature of HMRC’s APA program, issues that have been more difficult to deal with tend to relate to country specific issues, such as location savings.
- HMRC’s APA program is to resolve complex or difficult transfer pricing issues in advance; while it can be used to resolve transfer pricing audits, this is not the main reason that taxpayers use the program. Instead it is seen by taxpayers as an important part of HMRC’s real time working program. It enables taxpayers to proactively deal with difficult issues such as business restructuring where there is a likelihood of tax authority interest once the tax return has been submitted.
Q: Are there particular procedural issues that have been more difficult to deal with?
- Where the UK entity is central to a series of transactions, HMRC has to be conscious, in reaching agreement with a tax authority on one side of the series of transactions, of creating a potential exposure to the UK Exchequer should the tax authority on the other side of the series of transactions challenge the pricing.
- Sometimes taxpayers wish to include non-transfer pricing issues within the scope of the APA; for example domestic tax issues that affect only one party to the APA. These non-transfer pricing issues are not something HMRC can agree to within the actual APA, and may require involvement of specialists outside the APA team, so the inclusion can impact negatively on the length of time taken to reach agreement.
- Through the interaction of domestic legislation and the MAP procedure, the UK tax regime allows HMRC flexibility in how the principles of an APA can be rolled back to resolve prior year audits. This flexibility is not always available within other administrations and this can create restrictions on what can be achieved by the APA.
Q: Are there any issues that you would like to bring to the attend of taxpayers as potentially difficult?
- Taxpayers need to be realistic on timelines. Given the nature of the APA program, and demands on all tax administrations which impacts availability for meetings, there can be delays in dealing with individual cases. In bilateral cases, once the administrations have finalized the bilateral agreement, HMRC observes significant delays (often months) by taxpayers in finalizing domestic agreements: given that these agreements are the actual APA (as defined by legislation), there is no certainty of tax treatment until these agreements are in place.
- HMRC does not have unlimited resources and there are no fees for the application. Therefore the UK APA program is geared towards cases where there is transfer pricing risk created from complexity or difficulty in applying the transfer pricing rules, or a clear risk of double taxation.
- Taxpayers should always have a pre-filing (expression of interest) meeting with HMRC. HMRC will be able to tell the taxpayer whether the case is suitable for the APA program and indicate any potential areas of concern, as well as advise on what should be included in any application, before the taxpayer goes to the time and expense of making an application.
- HMRC does not distinguish between unilateral and bilateral APA applications and will look at the merits of a unilateral APA in the same way as if it were a bilateral APA. Unilateral agreements are not fast-tracked, but are typically concluded more quickly than bilateral agreements solely because there is no need to undertake the negotiation stage with the overseas tax authority.
Q: What are the main best practices you would recommend that taxpayers adopt in requesting and filing an APA?
- Speak to HMRC early so that they can advise taxpayers on the suitability of the case and aspects that should be covered in detail in the APA application. While this initial contact should be made to the central APA team at HMRC’s Business International department, it is important that the Customer Relationship Manager dealing with the taxpayer’s day-to-day tax affairs is kept informed of the application.
- Joint presentations to both tax administrations (if both administrations are willing to participate) early in the application process can save time and money. In all cases, information provided to one administration should be copied to the other administration.
- The taxpayer should be close to the process for example attending expression of interest and APA application meetings with both tax authorities and not delegate the process entirely to advisors.
- Taxpayers need to make a robust application containing sufficient information to support the position put forward. While HMRC understands that sometimes the taxpayer is taking a strategic position in the application, if the taxpayer changes its position between application and negotiation, this can be detrimental to the negotiation process in the long run.
- Once the taxpayer has provided all of the information they need to sit back and allow the tax authorities to discuss the case. Taxpayers also need to have an open mind about the outcome of the negotiations.
Trends and outlook
Q: Have you noticed certain trends in any of the following topics?
- Given the increase in inward investment HMRC is seeing more unilateral APA applications. Even through the application is unilateral the agreed APA will normally be shared with the relevant treaty partner.
- HMRC is seeing a trend in seeking to roll back APAs in response to difficult audits in overseas countries
- There are no obvious trends in terms of industry sectors; all sectors are represented in terms of interest in, and applications for, APAs.
- There is a trend for APAs with new markets such as China and India. HMRC expects to see significant interest going forward in bilateral applications with India.