In theory, APAs should be a “win-win” for all parties involved. Companies that enter them reduce their risk of future income assessment adjustments. Tax authorities can better understand the tax-related issues within the taxpayer’s industry and the concluded agreement ensures dependable future tax revenues. The certainty that APAs offer for both sides is key.
Negotiating an APA may consume a lot of time and resources. Most respondents with APAs in place believed the benefits outweigh any drawbacks. Statistics from tax authorities show the average time to process and complete APAs usually runs from 10 to 20 months. Processing times for unilateral APAs involving only one tax authority are usually shorter.
Compared to the time and effort involved in litigation, APA negotiation time is shorter and more predictable, and the taxpayer has more control over the timetable and resource commitments.
The biggest drawback of the APA process identified by respondents is the time and financial expense involved. Companies participating in APAs may need to devote significant resources at the expense of other projects. This drawback can be even more significant when dealing with tax authorities that have introduced APAs only recently and have not yet developed experience with the process.
Other identified drawbacks may be overstated. For example, some believe that the time and effort involved is not worth the risk that the APA negotiations could ultimately fail. But statistics show that once an APA request has been accepted, the proportion of APAs that are not ultimately completed is quite low.
Other respondents felt that participating in the APA process means exposing sensitive tax planning data to the tax authorities, offering them a road map to plan their audits. But again, because comparatively few APAs are not completed, the audit risk is substantially diminished.
In assessing the costs and benefits of pursuing and not pursuing an APA, experience shows that companies should weigh a broader spectrum of potential costs and benefits.
Perhaps the biggest benefit is the certainty gained for all of the years covered by the APA. For example, an APA can potentially cover multiple future audit cycles. In some cases, the APAs terms can be rolled back and applied to previous years. There is anecdotal evidence of some APAs covering up to 15 years with a single agreement.
This benefit must be compared to the costs of preparing contemporaneous documentation, defending against audits and obtaining resolution of double taxation through competent authority or litigation for the same number of years as an APA.
Beyond compliance, APAs can produce benefits in terms of reporting, releasing tax provisions, reducing reputational risk, and improving competitive advantage.
The experiences of tax authorities and taxpayers with its compilation of global survey data about the APA programs operating around the world.