The ATO releases its assessment of the Advance Pricing Agreement (APA) program.
Inside you will find
1. What are the Advance Pricing Agreements (APAs) and what was included in the ATO’s recent review
APAs are prospective agreements between MNEs and the ATO on transfer pricing (TP) positions to provide tax certainties for 3 to 5 years. The APA can be unilateral, bilateral and multilateral. For bilateral and multilateral APAs the agreement extends to be with the other relevant related parties and its tax authorities.
The APA program has currently three stages: Early Engagement, APA Application and Post Compliance. The early engagement stage is the very comprehensive part of the process requiring indebt preparation for the MNE to support the request for an Advance Pricing Agreement APA, workshops with the ATO, numerous information requests from the ATO and multiple internal ATO discussions and triage consultations before the ATO will decide whether to invite the MNE to submit the APA Application.
The APA Application stage is where all supporting documentation for the prospective TP position is provided to the ATO. This will be evaluated by the ATO and then negotiation on the terms and conditions of the agreement will commence. These will also include discussing the critical assumptions which could trigger the agreement to fault. This stage will finish by the time an agreement is made between the involved parties. Needless to say, for bilaterals and multilaterals these stages will be even more complex considering the additional parties involved to reach agreement.
The final compliance stage is to ensure that the agreement is upheld on a contemporaneous basis, and the obligation to notify all parties involved should any of the critical assumptions have been triggered. Further details on the APA Program can be found in the ATO’s guidance PS LA 2015/4: APAs.
Late last week, the ATO published its Findings Report from its assessment of the APA program. The Findings Report has been 18 months in the making, with the ATO initiating this review in early 2022. The review involved consultation with external stakeholders, including key clients, advisors, and other tax administrations, also ATO has updated its guidance on simplified transfer pricing, check it out.
The link to the Findings Report is attached below if you have an hour or so to spend reading the 18 pages of the report. If not, here is my 6-minute summarised version on the ATOs findings and my professional experience with the APA program.
2. Why did the ATO review the Advance Pricing Agreement APA program
The ATO has been critical of the how the Advance Pricing Agreement APA program is being managed for many years; from being accused of turning the early stages and APA application stages into an audit like situations, to being too aggressive in approach and causing long delays in the negotiating phases.
The ATO wanted to understand how it could improve the APA program and therefore conducted consultation through the stakeholder outlined above. It found the following key problems with the APA program:
- APAs take too long. Across FY18 to FY22, the average Bilateral APAs (BAPAs) took 3-4 years to agree, Unilateral APAs (UAPAs) 2-3 years, Multilateral APAs (MAPAs) 6-7 years (although there were only one in the dataset?!).
- The ATO is understaffed with the amount of request in early engagement and APA application stages to process causing the above delay.
- There are too many APAs with collateral issues – this puts a spanner in the works and contributes to the delays mentioned above.
- There is not enough transparency at the early engagement stage of the APA application. This causes some APAs to be unsuccessful. However the serious default matters are not picked up until several years into the application process which results in time wastage and takes ATO resources away from other APAs. This adds to the time delays mentioned above.
3. The ATO’s Call to Action to Combat the Problems Identified in the Findings Report
Considering the problems identified, the ATO have come forward with some key recommendations to rectify the APA program to be more efficient for all parties. The key recommendations are planned to be implemented over the next few months and include the following:
Prioritise the following Advance Pricing Agreement (APA) applications:
- BAPA/MAPA over UAPA – still allowing UAPAs and renewals of existing UAPAs however will be deprioritised over BAPA/MAPA as the ATO will focus on minimising double taxation risks.
- Significant dealings with tax uncertainty.
- Materiality a minimum threshold of $5M covered transactions or 80% of income or expenses.
ATO is planning to have two panels:
- Pre engagement panel. This decides who gets in and how collateral issues will be managed.
- The Advance Pricing Agreement APA Panel will consider any negotiation parameters for the Competent Authority and the ATO APA case team.
Both panels are chaired by the ATO SES officer who is responsible for the APA program, and who ultimately decides who is in and out of the APA program.
Setting out mutual obligations:
The ATO included comprehensive lists around what the multiple obligations would be for all parties involved to address the feedback including:
- Client (i.e.MNE) uncertainty about what is expected of them;
- How transparent ATO are regarding client requirements;
- Improvements to ATO’s communication during the APA term; and
- ATO staff experience and the level of information required for an Advance Pricing Agreement (APA).
Delivering governance improvements
The ATO has also committed to making improvements to the APA program’s governance based on feedback it received as part of the consultation process.
These improvements include
- formalising the review recommendations and Advance Pricing Agreement APA entry criteria by incorporating it into existing ATO guidance;
- re-evaluating the APA panel composition and meeting frequency; and
- publishing more detailed APA program statistics and insights on an annual basis.
3. Where to from here?
If you currently have an Advance Pricing Agreement APA or are considering applying for an APA in the future, the ATO’s review and recommendations might seem a bit daunting or at least confusing.
Whilst we welcome the ATO initiative to assess and improve the APA program, we don’t envision a huge change to the current APA program but see the ATO’s recommendations as reaffirming of the intentions with the initial program and its stages as detailed in PS LA 2015/4. We hope that the improvement plans will make all APA applications much more efficient for MNE’s wishing to apply for an APA in the near future.
One thing you should know if you are considering applying for a unilateral APA and do not have extreme tax uncertainties: the Report Findings confirms the ATO’s view on deprioritising unilateral APAs and somewhat renewals of these.
This change in focus away from Unilateral APAs has been in the making for years and has been evident in the ATO strategies on “training” MNE’s to self-assess their transfer pricing positions via justified trust programs, Practical Compliance Guidelines (PCGs), Streamlined Assurance Reviews (SARs), various risk reviews and new TP obligations.
Whereas self-assessment will not give you the satisfaction of guaranteed certainty during the APA terms, it could mean that supportive documentation for the prospective TP position could be prepared in the same manner as what would be required in an Advance Pricing Agreement (APA) application process, would not take as long, and would likely safeguard your TP position if challenged by the ATO.Benedicte Olrik
Managing Director, Transfer Pricing