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.