HMRC have updated their Statement of Practice on APAs. The new version reiterates HMRC’s commitment to APAs, but clarifies some limitations.
Following on from recent developments at the OECD and the European Commission in transfer pricing dispute resolution, HMRC have updated Statement of Practice 2 (2010) which sets out the process for obtaining Advance Pricing Agreements (APAs). It clarifies their position on the interaction between APAs and Diverted Profits Tax (DPT) and updates previous guidance on the impact of possible permanent establishments (PEs) on the APA discussions. It also represents a tightening of the admission criteria for taxpayers wishing to access the APA programme. While HMRC continue to welcome APA applications, they will only accept applications where the transfer pricing issues are ‘complex’, where there is a real risk of double taxation in the absence of an APA, and where HMRC consider it a good use of taxpayer and Governmental resources.
Some of the changes from the previous Statement of Practice (SoP) are confirmations of approaches that HMRC have already been taking. Whilst it has always been the case that an APA could not be used to give taxpayers comfort on the existence or otherwise of a PE, previously HMRC have been prepared to agree with taxpayers that the APA effectively determines the amount of taxable profit attributable to the UK, and that therefore any potential PE would have no further profit attributable to it. The updated SoP confirms the approach taken over the last few years, which is that HMRC will not discuss profit attribution to a PE unless and until a PE has been determined to exist.
On DPT, the SoP confirms that the APA programme cannot be used to agree the taxpayer’s DPT position, but an early discussion of DPT will be required, typically at the Expression of Interest meeting before the submission of a formal APA application.
HMRC have also expressed a strong preference for bilateral APAs, with unilateral APAs generally only being accepted where the transaction is with a non-treaty partner or country with no APA programme, or in situations where the UK transacts with multiple countries and the transactions with each country may be small, but the sum of those transactions for the UK is large.
Although HMRC have always used certain thresholds for deciding whether to accept an APA application, recent experience suggests the rewritten guidance on these thresholds reflects a more selective approach. HMRC will be most likely to accept an APA based on the following factors, taken together:
HMRC aim to complete APAs within 18-21 months of a formal application, however the most recently available data suggests an average APA will take several months longer.
HMRC have limited resources for negotiating APAs, and it is this that appears to be driving the more selective approach. However APAs remain a very useful tool for taxpayers to engage with HMRC and manage their transfer pricing risks in a proactive manner.
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