Advance pricing agreements (APAs) are quintessentially used to allow both the taxpayer and the competent authorities to determine appropriate transfer prices for transactions conducted by a taxpayer over a set period of time. As a result, the taxpayer obtains the assurance that transfer prices that were agreed upon through an APA will in principle not be subject to change. The risk of legal disputes and the resulting possibility of additional costs or obligations to pay more tax is diminished accordingly.
Even though Slovenia introduced and enacted legislation on determining transfer prices based on the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines (OECD Guidelines) in 2007, the possibility of concluding APAs with the Slovenian Financial Administration (FA) has only been possible since January 1, 2017. So far, only one APA has been successfully concluded, while a handful more are in the works. It is obvious that the entire process of concluding APAs is a novelty in Slovenia, meaning that general guides and legislation must be referred to in lieu of almost nonexistent practical experience.
This article will provide the general framework of the procedure to conclude an APA in Slovenia with respect to the FA’s guidelines and the relevant provisions of Slovenia’s legislation.
The procedure to conclude an APA may be initiated by any interested taxpayer which conducts transactions between its associated enterprise(s). The Slovenian Tax Procedure Act (TPA) allows for unilateral, bilateral and multilateral agreements. Since APAs are based on the determination of transfer prices, which are by their nature an international affair encompassing at least two states, the use of unilateral APAs is deemed to be an exception (in general it can be concluded in the absence of a double tax agreement or if the affected state declines or does not conclude a mutual agreement procedure (MAP). Moreover, if an APA (which affects another member state of the EU or of the OECD) is concluded, the FA is bound to inform the affected state’s competent authority.
In either case, the procedure for concluding an APA is divided into four basic phases:
- the preliminary procedure;
- negotiating, concluding and signing the contract;
- monitoring the implementation of the APA.
The Preliminary Procedure
The preliminary procedure starts with the taxpayer submitting a preparatory application. For a taxpayer to be eligible to submit an application, the following conditions have to be met:
- the taxpayer engages in transactions with associated entities;
- the taxpayer is deemed to be a taxpayer under the Slovenian Company Income Tax Act (CITA);
- the transaction has an economic substance and a genuine in-tent to be carried out;
- the transactions are guaranteed to be carried out for an appropriate period of time.
After the application is submitted the FA will inquire whether the competent tax authorities of the associated entities would be willing to enter into an APA. Subsequently a meeting is held between the taxpayer and the FA wherein general information is exchanged.
After the meeting or meetings have successfully concluded, the taxpayer is eligible to submit the main application to conclude an APA. When the application is submitted along with the necessary documentation, the FA has a three-month period in which to decide whether the APA will be entered into.
If the FA agrees to enter into the arrangement, it will send the taxpayer an acceptance notification. In the event that the FA does not agree to enter into the agreement, a rejection notification is sent, with an explanation. It should be noted that there is no legal remedy against the latter.
Thirty days after the notification in which the FA agreed to enter into an APA the taxpayer will be obligated to pay a sum of 15,000 euros ($16,680). If the taxpayer withdraws from the procedure at any time after the payment has been made, it will not be eligible for a refund. However, if the APA is not concluded for reasons outside the taxpayer’s control, a lump sum of 5,000 euros will be returned. Moreover, since an APA may be concluded for a maximum period of five years, an extension may be sought (at least six months before the expiration date of the APA) under the condition that all of the relevant circumstances are the same, and on a further payment of 7,500 euros.
After the payment has been made, the FA and the taxpayer enter into negotiations wherein they iron out the details, and in particular set the relevant critical assumptions (if the APA concerns future transactions). As under the OECD Guidelines, the purpose of setting critical assumptions is to prevent the APA from diverging from the arm’s length principle. If the critical assumptions are overstepped in such a way that they affect the suitability of the selected transfer pricing method, the APA will have to be adapted or expire. If a multilateral (or bilateral) APA is being concluded, a MAP has to be carried out before its conclusion. A unilateral APA with the FA may still be concluded in the event that a MAP does not end with an agreement. The FA and the taxpayer sign the APA after all the relevant circumstances have been discussed.
Throughout the duration of the APA, the taxpayer is obligated to file a report in regard to the validity of the critical assumptions and any adjustments made. The report is to be filed together with the taxpayer’s yearly tax return. Moreover, any changes to the critical assumptions have to be communicated to the FA within a period of not more than 30 days.
If a taxpayer is planning to conclude an APA in Slovenia it should be borne in mind that:
- concluding an APA agreement is still a rarity in Slovenia;
- the procedure for concluding an APA is lengthy (in Slovenia it takes approximately one to two years to be concluded);
- even though refunds are not possible the FA does not charge any fees for the preliminary procedure;
- a close connection has to be maintained between the taxpayer, the FA and any other affected state, in order that the purpose of the APA may be achieved.
Blaž Pate is a Partner and Mihael Pojbič is an Assistant with LeitnerLeitner.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners