Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee on the work of the EU Joint Transfer Pricing Forum in the field of dispute avoidance and resolution procedures and on Guidelines for Advance Pricing Agreements within the EU {SEC(2007) 246}
Date: 2007-02-26
Institutions: European Commission
Subjects: EU Member State, European Union, approximation of laws, double taxation, fiscal policy, tax authorities, taxpayer, transfer pricing

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 26.2.2007 
COM(2007) 71 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE 
EUROPEAN PARLIAMENT AND THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE 

on the work of the EU Joint Transfer Pricing Forum in the field of dispute avoidance 
and resolution procedures and on Guidelines for Advance Pricing Agreements 
within the EU 

{SEC(2007) 246} 

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TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

Aim and context ........................................................................................................... 3 

Activities of the EU Joint Transfer Pricing Forum from March 2005 to September 
2006.............................................................................................................................. 4 

Simultaneous tax examinations.................................................................................... 4 

Expert opinion or mediation......................................................................................... 4 

Prior notification, prior consultation or prior agreement. ............................................ 4 

Advance Pricing Agreements....................................................................................... 5 

2.5.  What are the salient points of the EU APA guidelines? .............................................. 5 

3. 

4. 

5. 

The Arbitration Convention and related issues............................................................ 6 

Future work programme of the JTPF ........................................................................... 7 

Commission conclusions.............................................................................................. 7 

ANNEX...................................................................................................................................... 9 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

7.1. 

7.2. 

7.3. 

7.4. 

8. 

8.1. 

8.2. 

8.3. 

8.4. 

8.5. 

8.6. 

Legal framework .......................................................................................................... 9 

Organisation of APA procedures in Member States .................................................... 9 

Entry to the APA programme .................................................................................... 10 

Fees ............................................................................................................................ 10 

Complexity thresholds ............................................................................................... 10 

Documentation ........................................................................................................... 11 

Conduct of the APA process ...................................................................................... 11 

Pre-filing/Informal application stage. ........................................................................ 11 

Formal application for APA....................................................................................... 12 

Evaluation and negotiation of the APA ..................................................................... 13 

Formal agreement of APA ......................................................................................... 14 

APAs: Specific areas.................................................................................................. 15 

Transactions and Participants in the APA.................................................................. 15 

Critical Assumptions.................................................................................................. 15 

Rollback ..................................................................................................................... 16 

Publication of statistics .............................................................................................. 16 

Unilateral APAs ......................................................................................................... 16 

Facilitating APAs for SMEs....................................................................................... 17 

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1. 

1. 

2. 

3. 

4. 

5. 

6. 

1 
2 
3 
4 
5 

AIM AND CONTEXT 

The existence within the EU of different sets of national transfer pricing rules laying 
down that transactions between taxpayers under common shareholder control should 
be  taxed  as  if  they  had  taken  place  between  independent  taxpayers  undermines  the 
proper  functioning  of  the  internal  market  and  represents  a  large  administrative 
burden on taxpayers . 

In  order  to  find  pragmatic  solutions  to  this  problem,  the  EU  Joint  Transfer  Pricing 
Forum (JTPF) was set-up by the Commission in October 2002. The Commission has 
reported  twice  on  the  work  of  the  JTPF  through  two  Communications.  The  first 
Communication1  presented  a  Code  of  Conduct2  on  the  Convention  for  the 
elimination of double taxation (the “Arbitration Convention3”) to ensure that it would 
operate more efficiently. The second communication4 presented a Code of Conduct5 
on documentation requirements for transfer pricing within the EU- the EU Transfer 
Pricing documentation (EUTPD.) The Code of Conduct on EUTPD sets out rules for 
the  amount  and  type  of  documentation  that  Member  States  will  request  and  accept 
for the purposes of their own transfer pricing rules. 

Transfer  pricing  related  disputes  between  a  taxpayer  and  a  tax  administration 
frequently lead to double taxation and hence to disputes between tax administrations 
to  relieve  this  double  tax.  While  the  Code  of  Conduct  on  the  effective 
implementation  of  the  Arbitration  Convention  adopted  by  Member  States  in 
December 2004 should in principle help to eliminate transfer pricing double taxation 
in  the  EU  within  a  time  frame  of  not  more  than  three  years,  it  would  be  highly 
desirable to avoid such disputes between tax administrations in the first place.  

This  third  Communication  therefore  has  as  its  main  objective  to  prevent  transfer 
pricing  disputes  and  associated  double  taxation  from  arising  in  the  first  place  by 
introducing Guidelines for Advance Pricing Agreements (hereafter: "APAs") within 
the EU. APAs are agreements between the tax administrations of EU Member States 
concerned defining how future transactions between related taxpayers established in 
two  or  more  Member  States  will  be  taxed.  The  Guidelines  are  based  on  the  best 
practice identified by the JTPF. 

The  Commission  considers  that  APAs  Guidelines  are  an  efficient  tool  for  dispute 
avoidance with valuable advantages for tax administrations and taxpayers. APAs will 
provide  in  advance  certainty  concerning  the  transfer  pricing  methodology  and 
therefore  simplify  or  prevent  costly  and  time-consuming  tax  examinations  into  the 
transactions included in the APA; this should lead to savings for all parties involved 
in an APA. 

These  APAs  Guidelines  explain  how  Member  States  should  conduct  the  APA 
process  and  provide  guidance  for  taxpayers  involved  in  the  process.  Following  the 

OJ C/2004/122 of 30/04/2004 p.4 
OJ C/2006/176 of 28/07/2006 p.8 
OJ L/1990/225 of 20/08/1990 – Convention 90/436/EEC 
OJ C/2006/49 of 28/02/2006 p.23 
OJ C/2006/176 of 28/07/2006 p.1 

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guidelines will result in a quick and efficient resolution of the APA process and in 
turn should encourage the use of APAs in the EU, leading to more dispute avoidance 
and less double taxation. 

2. 

7. 

ACTIVITIES OF THE EU JOINT TRANSFER PRICING FORUM FROM MARCH 2005 TO 
SEPTEMBER 2006 

The  full  report  compiled  by  the  JTPF  is  contained  in  a  staff  working  document6. 
Within  the  overall  scope  of  dispute  resolution  and  avoidance,  the  JTPF  considered 
several possible procedures which might lessen transfer pricing burdens on taxpayers 
within  the  EU.  These  were  simultaneous  tax  examinations,  expert  opinion  or 
mediation,  a  system  of  prior  notification,  consultation  or  agreement  and  the 
possibilities for APA procedures. 

2.1. 

Simultaneous tax examinations. 

8. 

These are generally considered as methods by which two or more countries combine 
efforts  to  audit  taxpayers  together.  While  the  JTPF  acknowledged  that  this  might 
have attractions for Member States from a compliance perspective, the opportunities 
for resolving disputes this way were considered to be fewer than the opportunities for 
creating them. 

2.2. 

Expert opinion or mediation. 

9. 

The JTPF reflected upon the statement in the commentary to article 25 of the OECD 
Model Tax Convention that countries might seek an advisory opinion from an expert 
to  help  resolve  double  taxation  cases.  Experts  from  the  tax  administrations  did  not 
consider  the  idea  of  intervention  by  a  third  party  expert  as  a  useful  tool  to  prevent 
double taxation in the light of the Arbitration Convention which already compels the 
resolution of cases through the medium of an independent arbitration panel. 

2.3. 

Prior notification, prior consultation or prior agreement. 

10. 

The JTPF examined the possibilities for a framework for prior agreement or at least 
consultation before tax administrations make transfer pricing adjustments. The inter-
action  could  be  limited  to  the  mere  notification  of  a  transfer  pricing  adjustment 
(which could speed up dispute resolution), be extended to prior consultation between 
tax administrations before a transfer pricing adjustment was made final (which could 
again speed up subsequent dispute resolution or avoid any subsequent resolution ever 
becoming  necessary)  or  use  of  a  system  of  prior  agreement  (whereby  a  tax 
administration  would  have  to  agree  to  provide  a  corresponding  adjustment  to 
eliminate  any  double  tax  before  the  first  adjustment  was  made  final)  to  prevent  a 
dispute from coming into existence in the first place. 

11. 

The JTPF found that, while it might be possible to do all of the above under existing 
mechanisms, to develop effective mechanisms would be time consuming and might 
well require fundamental changes in domestic laws. The JTPF felt that this might be 

6 

Not yet published 

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outside its remit and that its time and resources should be concentrated on developing 
APA procedures. 

12. 

The  Commission  considers  that  a  system  of  prior  agreement  would  eliminate  all 
double  taxation  within  the  EU  and  therefore  is  of  the  opinion  that  this  issue  could 
usefully be deepened in the future. 

2.4. 

Advance Pricing Agreements. 

13. 

14. 

An APA is an agreement between tax administrations over the way in which certain 
transfer pricing transactions between taxpayers will be taxed in the future. Hence an 
APA  often  prevents  the  need  for  a  dispute  between  tax  administrations  over  the 
transactions  included  in  the  APA.  APAs  are  an  exemplary  method  of  dispute 
avoidance. 

The  JTPF  examined  the  pros  and  cons  of  APAs  in  depth  and  concluded  that  there 
were significant advantages for taxpayers and tax administrations that can arise from 
APAs.  First  amongst  these  are  the  certainty  over  the  taxation  treatment  of  the 
transactions in the APA – a certainty enjoyed by both the tax administrations (which 
no longer have to conduct an audit to establish the correct transfer pricing; it is only 
the  correct  application  of  the  APA  that  has  to  be  checked)  and  the  taxpayers  (who 
know how to establish the correct transfer pricing since this has been agreed between 
the tax administrations involved.) 

15. 

Given  the  significant  advantages  of  APAs,  the  JTPF  felt  that  it  was  appropriate  to 
identify  best  practices  for  the  conduct  of  APA  procedures  in  the  EU.  These  are 
contained in the Guidelines in the Annex to this Communication. 

2.5.  What are the salient points of the EU APA guidelines? 

16. 

17. 

18. 

19. 

20. 

The  guidelines  lay  down  procedures  for  an  efficient  APA  process  and  detail  the 
stages usually found in an APA and what should ideally happen at each stage. 

These guidelines focus on bi and multilateral APAs because they are considered as 
the  most  efficient  tool  to  prevent  double  taxation.  However  the  Guidelines  also 
include a section on Unilateral APAs. 

The  guidelines  envisage  a  four  stage  process  and  describe  what  should  happen  at 
each stage. 

APAs start with the taxpayers' decision to request an APA. The guidelines suggest an 
informal  approach  be  made  to  all  the  tax  administrations  potentially  involved  and 
recommend  what  should  be  done  in  this  informal  stage  to  ensure  an  efficient 
resolution of the APA application. Details of the type of information that should be 
included  in  the  formal  application  are  provided  on  the  grounds  that,  although  each 
APA will be different, the type  of basic information  likely to  be  necessary  is often 
similar from case to case. 

Once the formal application is received, the guidelines describe what should happen 
for  the  efficient  conduct  of  the  process.  APAs  will  require  that  each  tax 
administration  involved  checks  the  application  to  decide  whether  the  proposed 
transfer pricing treatment in the application is acceptable. The precise details of the 

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21. 

22. 

23. 

3. 

24. 

25. 

26. 

27. 

28. 

transfer pricing treatment will also need to be negotiated and agreed between the tax 
administrations  involved.  Details  of  how  these  processes  should  be  done  are  laid 
down in the guidelines. 

APAs  will  require  formal  agreement  between  the  tax  administrations  involved,  so 
that they and the taxpayers involved are guaranteed certainty over the tax treatment 
of the transactions. The guidelines provide details over what should be in this formal 
agreement so that this certainty is given. 

A typical timeline is provided in appendix of the guidelines to illustrate the conduct 
of the APA process. 

The  guidelines  also  discuss  some  often  problematic  areas  which  frequently  arise 
during, or even before, APA procedures and detail ways in which these areas can be 
rendered less likely to impede an efficient resolution of the APA process itself. The 
JTPF  concentrated  on  areas  where  experience  has  shown  that  the  most  problems 
arise: retrospective application of the tax treatment in the APA, fees and complexity 
thresholds (which could constitute an undesired barrier to the APA process) and the 
types and amount of transactions that should be covered by the APA. 

THE ARBITRATION CONVENTION AND RELATED ISSUES. 

The follow-up of its work on the Arbitration Convention is an on-going process for 
the  JTPF.  It  is  vital  that  Member  States  respect  the  terms  of  the  Arbitration 
Convention and of the related Code of Conduct adopted in December 2004. 

With  regard  to  the  state  of  play  of  the  ratification  process  of  the  Accession 
Convention  to  the  Arbitration  Convention7,  at  the  end  of  September  2006,  twelve 
Member  States  had  ratified  it  and  the  other  Member  States  had  indicated  that  the 
Convention should be ratified in the coming months. 

The JTPF has also monitored the implementation of the recommendation included in 
its  first  Code  of  Conduct  related  to  the  suspension  of  tax  collection.  At  the  end  of 
September 2006, sixteen Member States have confirmed that they allow suspension 
of tax collection during the dispute resolution procedure and the other Member States 
have  replied  that  they  were  preparing  revised  texts  granting  this  possibility.  This 
issue will need further monitoring in the future. 

Finally an update of the 2005 questionnaire on pending mutual agreement procedure 
(MAPs)  under  the  EU  Arbitration  Convention  that  was  filled  in  by  Member  States 
tax  administrations  revealed  that  none  of  the  24  cases  for  which  the  taxpayer  had 
made the request prior to 1 January 2000 was sent to an Arbitration Commission. 

The  Commission  considers  that  the  number  of  long  outstanding  transfer  pricing 
double  tax  cases  means  that,  for  reasons  that  need  to  be  further  explored,  the 
Arbitration Convention is not eliminating transfer pricing related double taxation in 
the  EU  as  well  as  it  is  supposed  to.  The proper  functioning  of  the  single  market  is 
therefore  impaired.  The  Commission  intends  to  consider  how  this  failing  can  be 

7 

OJ C/2005/160 of 30/06/2005 p.1-22 

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addressed.  It  might  well  be  that  an  instrument  that  ensures  a  more  timely  and 
effective  elimination  of  double  taxation,  is  necessary  from  the  perspective  of  the 
single  market.  The  Commission  also  notes  that  the  AC  deals  only  with  transfer 
pricing related double taxation and that the new material in Article 25 of the OECD 
Model  Treaty  and  attached  commentary  goes  further  by  offering  treaty  partners  a 
binding, compulsory arbitration procedure for eliminating all double taxation. 

FUTURE WORK PROGRAMME OF THE JTPF 

Considering these recent achievements in transfer pricing within the EU and the need 
to ensure a monitoring of the implementation of the new tools  but also to continue 
the examination of several issues, the Commission has decided to renew the JTPF for 
a new mandate of two years. 

The JTPF has begun examining the potential new work programme for 2007-2008. 

Under the current work programme of the JTPF, in particular penalties and interest 
related to transfer pricing adjustments still need to be examined. 

In the future, no doubt dispute avoidance and resolution will continue to feature as 
they are of major importance to taxpayers and tax administrations. 

The Forum should also assist the Commission in monitoring the implementation by 
Member States of the Codes of Conduct and the Guidelines issued on the basis of the 
JTPF conclusions. Indeed Member States will have to report on the implementation 
of  the  different  instruments  and  on  practical  problems  ensued  from  their 
implementation.  This  will  allow  the  effectiveness  of  these  instruments  in  the 
elimination  of  double  taxation  in  connection  with  the  adjustment  of  profits  of 
associated enterprises to be assessed. 

As  regards  the  Arbitration  Convention,  the  Commission  having  received  additional 
feedback since the adoption of the Code of Conduct, points out the following issues 
where clarifications should be given to ensure a better functioning of the Convention: 
the  deadline  for  the  setting-up  of  the  arbitration  commission,  a  common 
understanding  of  the  definition  of  a  serious  penalty,  the  possible  extension  of  the 
scope to more than two Member States, the deadline to implement the final decision, 
the  role  of  the  taxpayer,  what  is  precisely  covered  by  a  transfer  pricing  adjustment 
(for  example  is  thin  capitalization  to  be  considered).  The  Commission  has  finally 
received  comments  arguing  for  the  setting-up  of  a  permanent  and  independent 
Secretariat. 

COMMISSION CONCLUSIONS 

The Commission congratulates the JTPF for its work and its contribution to a better 
environment  within  the  EU  for  lessening  the  burden  of  transfer  pricing  rules  in 
general  and  dispute  avoidance  and  resolution  procedures  in  particular.  The  JTPF 
achievements since October 2002 have lead to a number of improvements that have 
facilitated  cross-border  trade  and  therefore  have  improved  the  functioning  of  the 
Single Market. 

4. 

29. 

30. 

31. 

32. 

33. 

34. 

5. 

35. 

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36. 

37. 

38. 

39. 

With regard to the work achieved by the JTPF in the field of dispute avoidance and 
the  conclusions  and 
the  Commission  fully  supports 
resolution  procedures, 
suggestions  of  the  JTPF  on  APAs.  On  the  basis  of  this  work  the  Commission  has 
drawn up the attached Guidelines for APAs in the EU. 

These guidelines constitute a worthwhile blueprint for APA processes across the EU. 
By following the guidelines, Member States will encourage the use of APAs which 
will  lead  to  better  dispute  avoidance,  fewer  disputes  and  less  double  taxation.  This 
will  help  achieve  a  removal  of  tax  obstacles  and  the  primary  aims  of  the  single 
market: a better investment and more competitive business environment, growth and 
jobs. 

The Commission invites the Council to endorse the proposed Guidelines on APAs in 
the  EU  and  invites  Member  States  to  implement  quickly  the  recommendations 
included in the Guidelines in their national legislation or administrative rules. 

Member  States  are  invited  to  report  annually  to  the  Commission  on  any  measures 
they  have  taken  further  to  these  Guidelines  and  their  practical  functioning.  On  the 
basis of these reports, the Commission will periodically review these Guidelines. 

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ANNEX 

GUIDELINES FOR ADVANCE PRICING AGREEMENTS (APAS) 
 IN THE EUROPEAN UNION 

1. 

1. 

2. 

3. 

4. 

5. 

6. 

2. 

7. 

LEGAL FRAMEWORK 

Article  25  (3)  of  the  OECD  Model  Tax  Convention  permits  countries  to  enter  into 
Adavance Pricing Agreements (Hereafter APAs). 

An APA is an arrangement that determines, in advance of controlled transactions, an 
appropriate  set  of  criteria  (e.g.  method,  comparables  and  appropriate  adjustments 
thereto, critical assumptions as to future events) for the determination of the transfer 
pricing for those transactions over a fixed period of time. 

The  APA  should  not  agree  precisely  the  actual  profit  which  should  be  taxed  in  the 
future. 

The  APA  should  fix  according  to  the  arm's  length  principle  arrangements  for  the 
determining the transfer pricing for the future transactions in the APA. 

APAs must provide certainty for taxpayers and tax administrations. The precise way 
this  can  be  done  can  vary  depending  on  the  law  of  the  Member  State  in  which  the 
taxpayer pays tax. 

At  all  times,  the  taxpayer  is  subject  to  the  usual  rules  of  the  tax  administration. 
Where there is an APA, a tax administration still has the right to conduct an audit. 
However,  under  normal  circumstances,  the  audit  is  carried  out  only  to  check  and 
monitor  the  APA  by  reviewing  the  terms  and  critical  assumptions  underlying  the 
APA. 

Bilateral and multilateral APAs will require agreements between tax administrations 
and  understandings  between  each  tax  administration  and  the  taxpayer  concerned. 
Unilateral APAs will only require understandings between a tax administration and 
the taxpayer concerned  

ORGANISATION OF APA PROCEDURES IN MEMBER STATES 

Tax  administrations  should  be  able  to  draw  upon  all  of  their  skill  and  adequate 
resources to conduct an APA. 

APA programmes should be centrally co-ordinated. 

Tax  administrations  should  carry  out  two  broad  roles  to  deal  with  an  APA 
application: firstly, evaluating the application and secondly negotiating an agreement 
with the other tax administration. 

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8. 

3. 

9. 

10. 

11. 

The negotiations between tax administrations should be conducted by the Competent 
Authorities (Hereafter CAs). It is the CA's responsibility to ensure that the roles of 
checking  and  evaluating  the  APA  and  negotiating  with  other  countries  are  carried 
out.  This  applies  even  if  the  CA  calls  upon  other  parts  of  the  tax  administration  to 
provide specialist knowledge. 

ENTRY TO THE APA PROGRAMME 

It is up to the taxpayer to initially decide which transactions should be included in an 
APA application.  

The tax administration can review the application and modify or reject it. 

The  tax  administration  should  accept  the  application  where  all  requirements  have 
been met.  

In  practice,  taxpayer  and  tax  administration  should  work  together  to  establish 
mutually acceptable terms and conditions for an APA. 

A withdrawal of an APA application should not automatically trigger an audit 

Domestic  considerations  will  legitimately  affect  how  a  tax  administration  runs  its 
APA programme. 

Rules on fees and complexity thresholds can be used by tax administrations to ensure 
APAs  are  only  made  available  where  they  are  considered  appropriate  by  those  tax 
administrations. 

4. 

FEES 

12. 

It is for Member States to decide if a fee system is appropriate. 

13. 

14. 

5. 

15. 

A fee should not be a precondition for an efficient service which should be provided 
as a matter of course. 

If they are used, fees should be charged by reference to a lump sum amount as a pure 
entry fee and/or linked to the extra costs incurred by the tax administration as a result 
of the APA. 

Fees are particularly appropriate where without a fee a tax administration would be 
unable to have an APA programme. But they should not be set so high so as to be a 
disincentive to apply for an APA. 

COMPLEXITY THRESHOLDS 

If complexity thresholds are to be used, they should be used as a guide to whether an 
APA is appropriate and they should be dependent on the facts and circumstances of 
the case so not to be too prescriptive. 

Complexity thresholds should be operated consistently for all taxpayers. 

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16. 

17. 

6. 

18. 

19. 

7. 

20. 

The likely attitude of other tax administrations directly involved in any APA should 
also  be  a  factor  in  the  operation  of  any  complexity  threshold:  a  threshold  could  be 
lowered where other tax administrations are willing to accept an APA application. 

Whether a complexity threshold will operate to deny a taxpayer entry into an APA 
programme should be discussed at any pre-filing meeting. 

The  number  or  size  of  transactions  should  not  constitute  an  infallible  guide  to 
uncertainty or transfer pricing risk. Complexity thresholds should take into account 
the relative size and transfer pricing risk (to the taxpayer) of the transactions.  

DOCUMENTATION 

Where  a  Multinational  Enterprise  uses  the  EU  Transfer  Pricing  Documentation 
(EUTPD), this will serve as a useful basis for any APA application. 

Useful  additions  can  be  any  transfer  pricing  policy  documentation  on  which  the 
application  is  based  and  any  reports  received  on  which  the  application  relies. 
Documentation requirements should not be unduly onerous for taxpayers but the tax 
administration  must  be  given  the  opportunity  to  fully  evaluate  the  transactions 
included in the APA. 

Appendices A and B provide a list of documentation that is likely to be of use for any 
APA  application.  What  is  actually  required  in  the  formal  application  should  be 
agreed at the pre-filing stage. 

The  specific  information  necessary  to  monitor  the  application  of  the  APA  should 
always be agreed upon as part of the APA negotiation. The taxpayer must maintain 
documentation  throughout  the  APA  so  that  the  tax  administration  can  monitor  the 
way the APA is applied. 

CONDUCT OF THE APA PROCESS 

Tax administrations and taxpayers should work together in as cooperative a manner 
as possible to ensure that the APA is conducted as efficiently as possible. 

An APA application should typically have four distinct stages:  

(a) 

Pre-filing stage/Informal application 

(b) 

Formal application 

(c) 

Evaluation and negotiation of the APA 

(d) 

Formal agreement 

7.1. 

Pre-filing/Informal application stage. 

21. 

The  pre-filing  meeting  should  allow  all  parties  to  assess  the  likely  success  of  the 
APA.  The  tax  administration  should  be  provided  with  sufficient  information  to 

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permit  this  assessment.  This  information  should  at  least  describe  the  activity  and 
transactions  to  be  covered,  the  taxpayers  concerned,  the  preferred  methodology, 
desired length of the APA, any rollback and the countries to be involved. 

The pre-filing stage must allow the tax administration to make a reasoned judgement 
on whether the application will be acceptable. 

Taxpayers should approach the tax administrations as early as possible once they are 
clear about their intended actions when considering an APA. 

Tax  administrations  might  consider  anonymous  approaches  from  taxpayers  but 
nothing  binding  can  be  agreed  on  an  anonymous  basis.  At  any  rate,  the  taxpayer's 
intentions  should  be  relatively  fixed  for  the  anonymous  meeting  and  as  such  an 
anonymous approach should not be a protracted process. 

The tax administration should give a clear indication as soon as possible whether a 
taxpayer's  subsequent  formal  application  is  likely  to  be  accepted  and  also  indicate, 
where possible, which aspects might be more controversial. 

The  taxpayer  should  approach  all  of  the  Member  States  directly  involved  in  the 
envisaged  APA.  Where  more  than  one  tax  administration  is  consulted,  the  same 
information  should  be  provided  to  each  (this  should  apply  throughout  the  APA 
process). 

As part of the pre-filing stage, CAs should consult with one another where necessary. 
Where  such  a  consultation  is  deemed  necessary,  it  should  take  place  as  quickly  as 
possible. 

In  the  pre-filing  stage,  the  taxpayer  and  tax  administration  should  discuss  what 
documentation  should  be  included  with  the  formal  application.  Any  complexity 
threshold  should  also  be  discussed.  The  tax  administration  should  also  use  the  pre-
filing stage to influence the content of the application where this will aid an efficient 
outcome of the application. 

22. 

23. 

24. 

25. 

7.2. 

Formal application for APA 

26. 

Formal application for an APA should be made as early as possible in relation to the 
years to be covered by the APA and in particular soon after any informal approach. 
The taxpayer should make the formal application to the tax administration where it 
pays tax and at the same time to all other countries concerned. Where Member States 
have  different  administrative  or  legal  procedures  concerning  APAs,  it  is  the 
taxpayer's  responsibility  to  ensure  that  all  applications  are  made  in  time.  The  tax 
administration should endeavour to tell the taxpayer as soon as possible whether the 
application for an APA has been formally accepted for processing and to request as 
soon  as  possible  any  further  documentation  necessary  to  evaluate  the  APA  and  to 
formulate a position. 

Content of the formal application 

27. 

In  the  initial  formal  application,  the  taxpayer  should  try  to  enclose  all  relevant 
information  necessary  for  the  tax  administration  to  evaluate  the  application  and  to 
come to a view about the methodology that will be used later to calculate the arm's 

EN 

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length  price.  Appendices  A  and  B  contain  details  of  the  type  of  information  that 
might often be necessary in all instances but is not necessarily a minimum and is not 
the  maximum.  The  precise  information  necessary  for  the  formal  application  should 
be tailored to the specific case. 

28. 

A tax administration has the right to ask for supplementary information to evaluate 
the APA application. 

7.3. 

Evaluation and negotiation of the APA 

29. 

The aims of the evaluation and negotiation are distinct even if it might sometimes be 
appropriate to carry out these tasks partly together. A balanced approach should be 
adopted  to  ensure  that  the  evaluation  takes  place  as  quickly  as  possible  and  the 
negotiation begins as soon as possible. 

In  the  evaluation,  the  tax  administration  should  formulate  its  preferred  terms  and 
conditions for the APA. The negotiation with the other tax administrations concerned 
should  resolve  any  differences  which  arise  between  tax  administrations  so  that  one 
set of terms and conditions can be provided to all the taxpayers involved. 

As  soon  as  possible  after  a  formal  application  is  received,  the  CAs  of  the  tax 
administrations  concerned  should  contact  one  another  and  establish  a  timetable  for 
the  APA.  The  taxpayer  should  be  involved  in  the  creation  of  the  timetable  and  a 
model  timetable  is  contained  in  Appendix  C.  In  multilateral  APAs,  the  CAs  could 
agree that one CA takes the lead in organising the procedure.  

The taxpayer should help the tax administration to evaluate the  application through 
the provision of information. The evaluation should be completed as soon as possible 
to allow negotiation to be started. 

Tax administrations should make every effort to keep the burden of the evaluation to 
a minimum by requiring only pertinent information; taxpayers must in turn provide 
any information requested as quickly as possible. It should be possible to agree what 
information is relevant. 

All  information  provided  to  one  tax  administration  should  also  be  provided  to  the 
other  tax  administrations  involved.  Details  of  what  information  has  been  requested 
should also be exchanged. A convention should be established for each APA to say 
whether  the  taxpayer  or,  exceptionally,  the  tax  administration  through  exchange  of 
information will do this. 

Where  a  tax  administration  forms  an  evaluation  different  from  the  taxpayer's 
application, then its evaluation should be discussed with the taxpayer. 

As part of the evaluation process, the tax administration should try to obtain the tax 
payer's agreement with the position of the tax administration. It is advantageous for 
tax administration and taxpayer to work together to keep the proceedings on track to 
a mutually acceptable conclusion. 

Tax administrations and taxpayers should work together in an APA to minimise any 
delay,  in  particular  by  making  timely  requests  for  necessary  information  and 
supplying  information  in  a  timely  manner.  Tax  administrations  should  always 

30. 

31. 

32. 

33. 

34. 

35. 

36. 

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37. 

38. 

39. 

40. 

41. 

consider  making  joint/common  requests  for  information  when  this  will  further 
minimise delays. 

As soon as its evaluation is complete, a tax administration should endeavour to begin 
negotiations  and,  if  necessary,  the  other  tax  administration  involved  should 
endeavour to complete its own evaluation so that negotiations can begin. 

The evaluation stage should involve CA inter-action where this will aid reaching an 
APA.  Provisional  agreement  should  be  reached  where  possible.  However,  it  is 
preferable  that  a  tax  administration  has  in  mind  at  least  a  preliminary  evaluation 
before actual CA negotiations begin. 

If it would aid the APA procedure, preliminary negotiations should begin before the 
evaluation 
to 
inappropriately postpone finalizing the evaluation. 

this  should  not  permit 

tax  administrations 

is  finalised  but 

For  most  APAs,  each  CA  should  produce  a  position  paper  containing  the  tax 
administration's evaluation. The formal exchange of positions should take place with 
an exchange of CA position papers. This should be done as soon as possible after the 
application is received. 

Where  appropriate,  CAs  do  not  need  to  exchange  position  papers  if  this  makes  the 
APA  process  more  efficient  and  faster.  But  in  most  cases  having  all  CAs  prepare 
position papers before  full negotiations begin will help to identify and thus resolve 
any  disputes  quickly  and  efficiently.  Where  one  CA  has  prepared  a  position  paper, 
any other CA involved in the negotiation should at least set out what disagreement 
exists.  

Contents of CA position papers 

42. 

43. 

44. 

The  contents  of  a  position  paper  should  set  out  the  view  of  the  tax  administration 
involved  in  the  APA.  Appendix  D  lists  some  of  the  details  that  are  likely  to  be 
necessary in a CA position paper. 

Negotiations should be started by the sending of CA papers. A timetable should be 
agreed  for  the  negotiations.  Taxpayers  should  be  kept  informed  of  all  significant 
developments. 

If  the  CAs  agree,  taxpayers  should  be  allowed  to  attend  CA  meetings  to  address 
factual matters by making a presentation. 

If  beneficial,  CAs  should  arrange  regular  meetings  to  keep  the  whole  APA 
programme up-to-date but this should not impede arranging and conducting meetings 
on individual cases. 

7.4. 

Formal agreement of APA 

45. 

The  formal  APA  should  be  given  effect  by  formal  agreements  between  the  tax 
administrations  involved  (in  a  multi-lateral  APA  there  could  be  one  agreement 
between all tax administrations or a series of bilateral agreements between each tax 
administration). 

EN 

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All agreements should detail the terms and conditions of the APA. 

46. 

These agreements should give certainty to those involved in the APA and provided 
the relevant terms of the APA are met, then the transfer pricing for the transactions 
will  be  as  determined  in  the  APA  and  that  the  transactions  will  not  be  subject  to  a 
different interpretation by the tax administration. Tax administrations should ensure 
that they are able to provide this certainty. 

47. 

Appendix E contains information which is likely to be necessary for all APA formal 
agreements. 

8. 

APAS: SPECIFIC AREAS. 

8.1. 

Transactions and Participants in the APA. 

48. 

49. 

50. 

It is up to the taxpayer to initially decide which transactions and which group entities 
he wants to have included in the APA. But it is the decision of the tax administration 
whether it accepts the taxpayer's application. 

It  is  important  that  tax  administrations  are  as  flexible  as  possible  in  allowing  the 
taxpayer to include what he wishes in the APA. It is recommended that the taxpayer's 
logic for excluding as well as including companies and transactions is explained in 
the application. 

A  tax  administration  should  exchange  information  (EOI)  spontaneously  (subject  to 
any  domestic  law  limitations)  with  another  tax  administration  which  the  first  tax 
administration feels should be included in the APA. The taxpayer would need to be 
consulted about which tax administrations to involve in the APA since the taxpayer's 
agreement to the terms and conditions of the APA needs to be obtained. 

8.2. 

Critical Assumptions 

51. 

52. 

53. 

54. 

55. 

The taxpayer should describe in the application the assumptions on which the ability 
of  the  methodology  to  accurately  reflect  the  arm's  length  pricing  of  future 
transactions are based. 

Critical  assumptions  are  by  their  nature  vital  to  the  APA  and  should  be  drafted 
carefully to ensure the capability of the APA to reflect arm's length pricing. 

Taxpayers  and  tax  administrations  should  attempt  to  identify  critical  assumptions 
that are based where possible on observable, reliable and independent data. 

Critical  assumptions  should  be  tailored  to  the  individual  circumstances  of  the 
taxpayer,  the  particular  commercial  environment,  the  methodology  and  the  type  of 
transactions covered. 

Critical  assumptions  should  not  be  drawn  so  tightly  that  certainty  provided  by  the 
APA is jeopardised but should encompass as wide a variation of the underlying facts 
as those involved in the APA feel comfortable with. 

EN 

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56. 

The APA agreement should include parameters for an acceptable level of divergence 
for some assumptions in advance and only if these parameters are exceeded should a 
renegotiation become necessary. 

57. 

Taxpayers should inform their tax administrations if critical assumptions are not met. 

All those involved in the APA should consult with each other to examine the reasons 
why  a  critical  assumption  has  not  been  met  and  to  see  if  the  APA  methodology  is 
still appropriate. 

An attempt should be made renegotiate the APA if at all possible. 

8.3. 

Rollback 

58. 

59. 

60. 

61. 

Rollback  –  when  provided  for  in  domestic  legislation  –can  be  considered  where  it 
will resolve disputes or remove the possibility of disputes in earlier periods. 

Rollback should only be  a secondary result of the  APA and  should  only be carried 
out where it is appropriate to the facts of the case. Similar facts and circumstances to 
those in the APA should have existed for previous periods in order for rollback to be 
appropriate. 

Rollback of the APA should only be applied with the taxpayer's consent. 

A  tax  administration  has  recourse  to  the  usual  domestic  measures  if,  as  part  of  the 
APA  process,  it  discovers  information  which  would  affect  the  taxation  of  earlier 
periods.  But  tax  administrations  should  advise  the  taxpayer  of  any  such  intended 
action to give the taxpayer the opportunity of explaining any apparent inconsistency 
before making a tax re-assessment concerning previous periods. 

8.4. 

Publication of statistics 

62. 

The publication of some statistical information on APAs by each tax administration 
would be useful 

8.5. 

Unilateral APAs 

63. 

64. 

65. 

Although there may be circumstances where the taxpayer has good reasons to believe 
that  a  unilateral  APA  is  more  appropriate  than  a  bilateral,  bilateral  APAs  are 
preferred  over  unilateral  APAs.  Where  a  unilateral  APA  may  reduce  the  risk  of 
double  taxation  to  some  degree,  care  must  be  taken  that  unilateral  APAs  are 
consistent with the arm's length principle in the same way as bilateral or multilateral 
APAs. 

In  the  first  instance  the  taxpayer  has  the  right  to  decide  whether  a  unilateral  or 
bilateral APA is required. 

The  option  of  including  another  MS  in  the  APA  could  be  considered  by  the  MS 
preparing  for  a  unilateral  APA.  Taxpayers  however  should  not  be  forced  into  a 
bilateral APA. 

EN 

16 

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66. 

67. 

68. 

Tax administrations are entitled to turn down requests for unilateral APAs where the 
tax administration feels that a bilateral or multi-lateral APA is more appropriate, or 
feels that no APA at all is appropriate. 

The rights  of other  tax administrations and taxpayers should not be affected by the 
existence of a unilateral APA. When a unilateral APA is concluded, a MAP should 
not be excluded afterwards 

With  the  "Code  of  Conduct"  (Business  Taxation),  Member  States  have  committed 
themselves  to  spontaneously  exchange  details  of  concluded  unilateral  APAs.  The 
Exchange  of  Information  (EOI)  should  be  made  to  any  other  tax  administration 
directly concerned by the unilateral APA and should be done as swiftly as possible 
after the conclusion of the APA. 

8.6. 

Facilitating APAs for SMEs 

69. 

Tax administrations  should use their  experience  of  the  problems  faced  by  SMEs  to 
facilitate access to APAs for SMEs where APAs are useful for dispute avoidance or 
resolution 

EN 

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Appendix A – A list of the type of information that is likely to be 
necessary with the formal application for a bilateral or 
multilateral APA. 

The  actual  information  will  vary  depending  on  the  facts  of  the  case  and  would  need  to  be 
discussed between the taxpayers and tax administrations, ideally at the pre-filing meeting. 

This information can be considered as two broad types: information about the past –historical 
information – which might already exist in some format but will need to be compiled for the 
APA and information that may need to be created specifically for the APA. 

When  considering  historical  information,  MS  should  keep  in  mind  that  APAs  concern  the 
future  and  that  historical  information  may  have  less  relevance  for  future  periods.  That  said, 
historical information will be necessary to place the APA in perspective and to allow better 
judgements about the future to be made. 

The  pre-filing  stage  is  a  useful  time  for  tax  administration  and  taxpayer  to  decide  what 
information should accompany the formal application. The aim should be to strike a balance 
between  the  tax  administration  having  enough  information  to  consider  the  application 
properly  and  the  taxpayer  not  being  required  to  produce  unnecessarily  onerous  amounts  of 
information. 

In all cases the tax administration has the right to require further information and the taxpayer 
has the right to submit further information. 

1. 

2. 

3. 

4. 

5. 

Names  and  addresses  of  all  associated  enterprises  (including  all  permanent 
establishments) in the APA. 

A group structure showing all entities involved in the trade of the enterprises in the 
APA. 

An analysis of industry and market trends which are expected to affect the business. 
Any  marketing  or  financial  studies  for  the  business  which  lead  to  this  expectation 
should  also  be  provided  where  relevant.  An  outline  should  be  provided  of  the 
business strategy expected to be used for the period of the APA and, where different, 
of the strategy employed for previous periods. This might include projections used in 
the  plan  for  the  future,  management  budgets,  information  on  expected  business 
trends  and  competition,  future  marketing,  production  or  R&D  strategy.  Details  of 
who has the power and responsibility of developing and dictating business  strategy 
could be provided. 

The period for which the taxpayer desires that the APA should apply, including any 
request for rollback. 

A functional analysis (see Appendix B) of the parties and transactions to be covered 
by the APA 

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6. 

7. 

8. 

9. 

10. 

11. 

12. 

The  reason  why  the  taxpayer  feels  an  APA  is  appropriate  for  these  particular 
transactions. 

The critical assumptions integral to the APA. 

Details  of  the  proposed  methodology  for  the  covered  transactions  and  evidence  for 
the  view  that  this  produces  results  consistent  with  the  arm's  length  principle. 
Depending  on  the  methodology  and  how  it  is  to  be  applied,  this  evidence  could 
include:  

(a) 

A  review  of  the  five  OECD  comparability  factors  including  comparables  and 
any adjustments made to achieve comparability. 

(b) 

Reasons why the method in the APA application was selected  

(c) 

A  demonstration  by  reference  to  financial  information  of  how  the  proposed 
methodology is to be implemented. 

A list of any APAs already entered into by any of the associated enterprises involved 
in the APA which relate to the same or similar transactions if not already available to 
the tax authorities. 

Details of financial information of the entities in the APA for the three years prior to 
the APA. This could embody: 

(a) 

the three years statutory accounts. 

(b) 

an  analysis  of  product/service  lines  showing  gross  and  net  margins  with 
associated  costs  for  the  products/services  to  be  included  in  the  APA,  if 
available and useful. 

A  list  of  any  legal  agreements  between  any  associated  enterprises  which  affect  the 
transactions  in  the  APA.  For  example,  licence  agreements,  purchase  agreements, 
distribution agreements, R&D service agreements. 

For  any  years  where  a  rollback  is  requested  –  where  possible  in  domestic  law  - 
details  of  the  tax  position  of  each  entity  involved  for  these  years,  e.g.  tax  return 
agreed,  submitted  but  not  agreed,  submitted  and  under  audit  etc.,  together  with 
details of any MAP process still open and an analysis of the time limits laws in place 
in  each  relevant  jurisdiction  to  show  whether  years  of  assessment  are  capable  of 
being adjusted. 

EN 

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Appendix B: Functional Analysis 

The functional analysis is the key tool for any transfer pricing work. The contents should be 
tailored to the specific taxpayer and the transactions in the APA. Dependant on the situation, 
the  APA  application  should  also  show  to  a  certain  extent  which  entity  carries  out  what 
functions  in  the  overall  business  of  the  MNE.  Tax  administrations  however  should  keep  in 
mind that they are not evaluating transactions which are not in the APA. This information will 
have to be sufficient for them to understand both ends of the transactions under review. 

Activities and Functions 

All  the  activities  relating  to  the  transactions  covered  by  the  APA  should  be  described 
(Research  and  development,  manufacturing,  distribution,  marketing,  the  type  of  service 
activity carried out, etc.) The economic and entrepreneurial worth of these activities should be 
made clear along with details of how these activities inter-act with those carried out by other 
group entities. The market and the level in the market place of the entity should be described, 
along with the type of customer, what product is sold, how it is developed or acquired, who it 
is acquired from and sold to. 

Risks 

The  risks  assumed  by  the  entity  with  regard  to  the  transactions  in  the  APA  should  be 
described  and  assessed.  Typical  risks  might  include  product,  technological,  obsolescence, 
market, credit, foreign exchange and legal. 

Assets employed  

The  amount  and  type  of  working  capital,  tangible  and  intangible  assets  utilised  in  the  APA 
should be described. Again the relative importance of these in the trade should be analysed if 
possible. 

There  will  be  further  details  necessary  if  intellectual  property  right  (IPR)  is  used  in  the 
transactions in the APA. Information should be provided on how the IPR was created within 
the group or acquired by the group. It should be made clear which entity now owns the IPR 
and how it came to do so, how it is utilised and what value it adds to the business. 

EN 

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Appendix C: Tentative time frame for concluding an APA 

Every  APA  is  different;  therefore,  there  are  inherent  dangers  in  stipulating  a  common 
timetable for every APA. Best practice is for all parties to formulate a timetable as early as 
possible once the APA application has been received. Tax administrations can help keep the 
time  to  negotiate  an  APA  as  short  as  possible  by  examining  information  quickly  and 
efficiently; taxpayers can help to keep the time to negotiate an APA as short as possible by 
providing complete information quickly. The timetable below is illustrative, but contains all 
the stages typically found in APAs.  

Pre-filing stage – informal application – month 0 

An informal approach is made by a taxpayer to two tax administrations, requesting an APA. 
The tax administrations listen to the statements made and indicate whether the particular case 
merits an APA.  The tax  administrations consult  with  one  another to  ensure both  will agree. 
Each has brief discussions with the taxpayer over what information should be provided in the 
first instance and explores what methodology will be appropriate.  

Months 1-3 

The formal application is received by each tax administration. The CAs establish in month 1 a 
timetable  to  evaluate  and  negotiate  the  APA.  Both  tax  administrations  conduct  an  initial 
review independently and issue information requests if necessary.  

Months 4-12 

Tax  administrations  continue  to  evaluate  independently  with  the  full  cooperation  of  the 
taxpayers. A first full face to face meeting could take place with a presentation to all involved 
parties  by  the  taxpayer.  The  CAs  consult  as  appropriate.  The  taxpayer  is  involved  in  this 
evaluation and is consulted. By the end of this period each tax administration has formulated 
its  position.  The  CAs  are  able  to  exchange  position  papers.  They  agree  to  meet  to  discuss 
these in Month 14. 

Month 13 

Each  CA  evaluates  the  other  CA's  position  paper  and  obtains  further  information  where 
necessary.  (Alternatively,  in  month  12  one  CA  issues  a  position  paper  and  in  month  13  the 
other CA issues a position paper rebutting the position and suggesting alternatives.) 

Months 14-16 

Discussions occur between CAs. Further clarifications are obtained from the taxpayer who is 
kept informed of the CA negotiations. 

Month 17  

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The CAs reach agreement. The taxpayers are consulted and indicate their agreement. 

Month 18 

The  APA  is  formally  agreed  between  the  CAs.  Formal  documents  are  exchanged.  The 
taxpayers receive assurances that the APA is acceptable. 

More  complex  cases  may  take  longer,  but,  with  the  cooperation  and  planning  of  all  parties, 
the time taken to conclude an APA should be kept to a minimum. 

EN 

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Appendix D: Contents of the CA position paper 

Since  each  case  will  be  different  position  papers  will  vary.  But  below  is  general  guidance 
which should be applicable for the contents of all position papers. The key to concluding an 
APA procedure without unnecessary delay will always be to commence CA negotiations most 
often through a position paper as soon as possible after the application is received. 

It will often be appropriate for a position paper to contain: 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

The conclusion of the CA together with a rationale. This should include details of the 
preferred methodology and the reasoning for this. 

Reasons for any rejection or modification of the taxpayer's initially preferred method. 

Details of the facts considered as most relevant in forming the above conclusion. If 
relevant,  special  consideration  should  be  given  to  any  facts  which  came  to  light 
during the APA process as opposed to in the original application. 

Details of the critical assumptions that the APA will be dependent on. 

A position on any retrospective element and on the future length of the APA. 

Suggestions on how the APA should be monitored. 

A  description  of  the  Treaty  law  and  domestic  law  that  will  govern  the  APA  and 
provide certainty for the taxpayer. 

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Appendix E: Details likely to be necessary in an APA agreement  

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

The duration of the APA and day of entry into force. 

Details  of  the  methodology  acceptable  for  determining  transfer  pricing  and  the 
critical assumptions (see appendix F) that must be followed for the APA to apply. 

An agreement that the APA will be binding on the tax administrations involved  

An agreement of how the APA is to be monitored  

An  agreement  of  what  documentation  is  to  be  maintained  throughout  the  APA  to 
allow monitoring to take place, for example an annual report. 

Any agreement on any retrospective treatment. 

Any circumstances which will require the APA to be revised. 

Any  circumstances  which  will  result  in  the  APA  being  rescinded  prospectively  or 
even retrospectively (for instance if false information has been provided.) 

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APPENDIX F – Critical assumptions 

Critical assumptions will vary depending on the APA itself but it is possible that assumptions 
will need to be made about some of the following areas: 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

the relevant domestic tax law and treaty provisions; 

the tariffs, duties, import restrictions and government regulations; 

the  economic  conditions,  market  share,  market  conditions,  end-selling  price,  and 
sales volume; 

the nature of the functions and risks of the enterprises involved in the transactions; 

the exchange rates, interest rates, credit rating and capital structure; 

the management or financial accounting and classification of income and expenses;  

the enterprises that will operate in each jurisdiction and the form in which they will 
do so. 

EN 

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