INSIGHT: Advance Pricing Arrangement Series—Europe (Part 1)

In the years following the introduction of the Organization for Economic Cooperation and Development (OECD) action plan on Base Erosion and Profit Shifting (BEPS), KPMG is expecting a significant increase in transfer pricing controversy. This rise of transfer pricing controversy is fueled by an increase in exchange of information between tax authorities, the number and qualification of tax auditors, tax authority aggressiveness, tax authorities’ use of technology to identify transfer pricing risks and inconsistencies, developing tax laws and regulations, and public pressure on governments to increase revenues generated from corporate income taxes.

Tax authorities have been fighting tax evasion and aggressive tax avoidance through increased transparency. The importance of providing greater tax certainty to taxpayers to support trade, investment and economic growth remain an important focus area for both taxpayers and governments. At the same time, the European economy is encountering the debt crisis, Brexit, trade wars, and tariff discussions. Against this background, multinationals have an increasing demand for legal and planning certainty. Thus, KPMG has seen an increase of Advance Pricing Arrangement (APA) applications covering countries in Europe.

This article analyzes these programs in Belgium, Denmark, Germany, Italy, the Netherlands, Poland, Portugal, Spain, Sweden, Switzerland, Ukraine, and the UK.

HISTORICAL OVERVIEW

Belgium

In Belgium, both bilateral APAs (BAPAs) and multilateral APAs (MAPAs) are possible in application of article 25 of most of the double tax treaties concluded by Belgium. The first MAPA was concluded in Belgium in early April 2004. The taxpayers benefiting from these early MAPAs were financial services companies.

In addition to the BAPA/MAPA-program of the International Relations department of the Belgian Central Tax Authorities, another service of the Belgian tax authorities is dealing with unilateral APAs (UAPAs). It is the Ruling Commission or Service for Advance Decision in Tax Matters that has been responsible for issuing UAPAs since 1993.

Denmark

The Danish Competent Authority is responsible for agreeing to all APAs and transfer pricing Mutual Agreement Procedure (MAP) requests. BAPAs have been agreed using the provisions of double taxation conventions. During the early years, a small team of specialists were identified to deal with MAP and BAPA requests. The first milestone arrangement was between Denmark and Japan in the mid-1990’s. In 2009, a BAPA between Denmark and China attracted considerable media interest as Denmark was the first European country to conclude a BAPA with China.

Today the competent authority of Denmark has substantial experience in negotiating BAPAs and has over the last decade concluded many of them. In general, many taxpayers have submitted BAPA applications in Denmark as a result of an often elongated transfer pricing examination in Denmark or abroad, and this has been an effective way of resolving transfer pricing disputes.

Germany

The German Ministry of Finance started discussions about the introduction of APAs nearly 20 years ago and drafted its first APA guidelines in 2000. The discussion to establish rules for BAPAs in Germany gained speed when the German, French, Spanish, and British tax authorities concluded a MAPA for the Airbus group in 2004. The German Ministry of Finance subsequently centralized the administrative competence for BAPAs in the Federal Central Tax Office (FCTO) in Bonn. In 2006, the German Ministry of Finance issued a BAPA circular defining the BAPA procedures and providing guidance with regard to the negotiation of BAPAs. Taxpayers may apply for BAPAs or MAPAs. MAPAs are treated as a combination of BAPAs. UAPAs are generally not accepted (with rare exceptions, e.g. if no double tax treaty is in place).

Italy

The Italian APA procedure was introduced in 2003 (with specific reference to UAPAs) and was implemented in 2004 through a decree which provided guidelines and discussed procedural issues. It took effect in February 2005 after the favorable advice of the European Commission. The domestic procedure allowed a resident taxpayer to file an APA request on the basis of article 25(3) of the OECD’s Model Tax Convention on Income and on Capital ( OECD Model Convention).

Starting from 2010, Italy has been prepared to accept applications for BAPAs and MAPAs. At Dec.31, 2014, 32 BAPAs/MAPAs were still in process. At the beginning of 2015, the first BAPAs were concluded.

New rules released at the end of 2015 replaced the former provisions, clarifying and improving the current framework in relation to BAPAs/MAPAs, and the retroactive effects of both UAPAs and BAPAS (roll-back). This provision made the Italian APA system consistent with foreign tax systems by reducing misalignments in the terms of BAPAs/MAPAs.

Starting from Jan. 1, 2015, taxpayers are required to enter into a UAPA procedure for access to the paten box regime, which determines a reduction in taxation for corporate and regional tax purposes on income derived from the exploitation of different categories of intangible assets specifically listed by the law.

Netherlands

Formal APAs were first introduced in Netherlands in 2001 with the first APA Decree (nr. IFZ2001/292M) being published on March 30 of that year. At that time, the then existing ruling team of the Dutch tax authorities (DTA) was expanded to become one team for Dutch APAs and Advance Tax Rulings (ATRs), with ATRs covering tax and APAs covering transfer pricing aspects. This team has been handling UAPAs and BAPAs since then, jointly with the competent tax inspectors and the specialists of the transfer pricing coordination group of the DTA.

Poland

APAs (UAPAs, BAPAs, and MAPAs) were first introduced in Poland in 2006. At the very beginning of the APA program in Poland, there was limited interest from taxpayers to negotiate with the authorities aiming to confirm the transfer pricing methodology or pricing policy in the form of the APA. It resulted from the lack of the tradition of negotiations with tax authorities and rather common mistrust towards the fiscal authorities.

The APA procedure was designed in such a way that the discussions were held at the level of the Ministry of Finance, where the group dedicated to deal with APA requests was created. It raised the importance of the proceedings and also underlined the difference between the discussions with the APA competent authority versus the regular tax office. Moreover, the proceedings, although not possible on a no-name basis, are confidential, which means that no information is disclosed by the competent authority to the taxpayer’s relevant tax office until the APA is concluded. Therefore, slowly more trust was gained by the authorities and the first negotiations started.

Portugal

APAs were first introduced in Portugal in 2008. The first UAPA was concluded early 2012, covering the automobile sector for a U.S. subsidiary. The first BAPA was initiated in 2010 and concluded in 2018, involving Germany, also for the automobile sector. The APA program is managed by the Major Taxpayers team which comprises a team of highly qualified tax inspectors. Currently, APAs are being concluded in a much shorter time period (2-3 years).

Spain

APAs were first introduced in Spain in 1995 when, although there was a transfer pricing provision in the law, such provision was not fully compliant with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) and tax authorities certainly did not focus on transfer pricing. Therefore, transfer pricing in practice was introduced in Spain through the APA program as both specific transfer pricing audits or MAP were scarce.

During the early years, there were very few requests but enough to identify the problems that were encountered in practice for which the first legislation did not provide an answer. At the same time, a small team of specialists to deal with APA requests was identified.

In 2004, the current corporate tax law was passed, which slightly modified the APA legislation. In particular it introduced a rollback provision. Regulation 634/2015 introduced an APA specific procedure and provided further guidance making the APA program in Spain in practice a very mature and successful option to manage risks.

In 2013, the Oficina Nacional de Fiscalidad Internacional (ONFI) was created. The ONFI is a specialized body with approximately 50 officials, most of them with high seniority, knowledge and experience in international matters, who deal with APAs, competent authority procedures, as well as assistance to tax audits in international affairs. This body has provided an adequate structure to deal with all the international challenges, although there is a need to increase resources.

Sweden

APAs were first introduced in Sweden in 2010. The Swedish Tax Authority handles all applications on its own, and only BAPA or MAPA applications are accepted. The fee for submitting an application is set at SEK 150,000 (approximately EUR 14,000 or USD 16,000) the first time for each country and is a bit lower for APA renewals. Most APA applications concern restructurings in major multinational enterprises (MNEs) or remuneration levels to sales entities.

Switzerland

The first APA in Switzerland was concluded in the 1990’s between a Swiss taxpayer and a related party in the U.S. Since the introduction of the APA program, there has been a significant increase in the number of requests for competent authority assistance in dispute resolutions, as well as APA applications by Swiss taxpayers.

Compared to other competent authorities, the State Secretariat for International Finance (SIF) operates with a rather lean team, and optimizes its processes, for example, by accepting APA filings only via the counterparty jurisdiction. However, the SIF team is experienced in all aspects of transfer pricing and has increased its headcount in recent years.

Ukraine

APAs were introduced in Ukraine in 2013. In 2015, a working group dealing with APAs was created at the State Fiscal Service of Ukraine for a preliminary pricing agreement. The APA order No. 504 was approved by the Cabinet of Ministers of Ukraine on July 17, 2015. The procedure for mutual agreement procedures in controlled transactions resulting in agreements conclusion which are one-sided, bilateral, and multilateral for the purposes of transfer pricing (see https://zakon.rada.gov.ua/laws/show/504-2015-%D0%BF).

APAs are available for large taxpayers only. Taxpayers are considered ”large”’ under the following conditions:

• if their overall revenue, from all types of activity in the four most recent tax (reporting) quarters, exceeds the equivalent of 50 million euros ($55 million); or

• if the total amount of taxes, fees and payments to Ukraine’s state budget for the same period exceeds the equivalent of 1 million euros, based on the average official exchange rate of the National Bank of Ukraine for the same period and provided that the sum of such taxes, fees and charges less customs payments exceeds the equivalent of 500,000 euros.

Such arrangements may be UAPAs, BAPAs or MAPAs.

United Kingdom

In 1999, APA legislation was introduced into the U.K. and a formal APA program started shortly thereafter. A small number of BAPAs had been agreed to prior to this using the provisions of double taxation conventions. The U.K. competent authority function for transfer pricing, generally housed in Her Majesty’s Revenue & Customs (HMRC)’s Head Office Transfer Pricing team, is responsible for agreeing all APAs and transfer pricing MAP requests. Until 2016 HMRC’s specialist Oil & Gas office had its own Delegated Competent Authority and agreed to some APAs. Now all APAs are co-ordinated by the HMRC Head Office for Transfer Pricing.

An APA Statement of Practice has been published since 1999 and was last updated in November 2016 by APA Lead Nick Stevart. Criteria for admission into the HMRC APA program were tightened at this time reflecting HMRC’s experiences, and UAPA applications are now generally discouraged (see https://www.gov.uk/government/publications/statement-of-practice-2-2010/statement-of-practice-2-2010).

CURRENT STATISTICS

Belgium

As per the end of 2017, 17 BAPAs/MAPAs were in force. Thirteen BAPAs were in force with EU countries and four with non-EU countries. The average time to negotiate BAPAs and MAPAs amounted to 30 months. In 2018, it is estimated that 13 BAPAs/MAPAs have been concluded. A total of 29 were pending in 2018 of which two are MAPAs (involving respectively three and five countries).

The below figures, based on the Annual Reports 2012-2017 published by the Federal Public Service Finance, support the trend that the number of BAPAs and MAPAs are on the rise in Belgium.

A much larger number of UAPAs is being concluded by the Ruling Commission. The below quoted numbers are underestimated as some topics, such as UAPAs concerning the patent income deduction or the deduction for innovation income, are de facto transfer pricing rulings as well, based on figures as reported in the Annual Reports of the Belgian Ruling Commission (see https://www.ruling.be).

Although a slight decrease of UAPAs is being noticed since the automatic exchange of UAPAs, unilateral transfer pricing rulings in Belgium are still very popular in the country as one of the ways to get more advance certainty on the acceptance of transfer prices or transfer pricing policies by the Belgian tax authorities. The biggest advantage of UAPAs is that field transfer pricing inspectors are bound by the decision of the Ruling Commission insofar that all critical assumptions are complied with by the taxpayer.

Denmark

In recent years, the competent authority concluded 6-8 BAPAs per year. The on-going BAPAs increased significantly in 2017.

Germany

The German tax authorities do not publish BAPA statistics locally but they refer to the respective statistics of the EU. The latest statistics that are available for Germany are from 2017 and show the following figures:

Italy

In 2010, the Italian tax authorities issued a first bulletin including statistics up to Dec. 31, 2009 (see International Standard Ruling Report, Central Directorate for Tax Assessment, International Division, International Ruling Office, Rome, April 21, 2010). These statistics were updated up to Dec. 31, 2012 in a further bulletin issued on March 20, 2013 (see https://www.agenziaentrate.gov.it/wps/file/Nsilib/Nsi/Schede/Istanze/Accordi+preventivi++imprese+internazionali/Bollettino+Ruling/II+edizione+Bollettino+del+Ruling+di+standard+internazionale/Bollettino+del+Ruling+di+standard+internazionale_II+edizione.pdf).

The Italian tax authorities have not published APA statistics since 2013. The latest statistics available for Italy are the EU statistics from 2017.

The demand for APAs in Italy has consistently increased over the years (150 in 2017) as well as the numbers of APAs granted (36 in 2017) and in force (109 in 2017 involving both EU and non EU countries). At the same time, the average time taken to reach the APA has increased (55 months for APAs with EU countries and 51 months for non-EU countries).

Netherlands

According to the latest data publicly available, between 2011 and 2018, 1,748 APAs were signed by the DTA.

As the above table shows, the number of APAs has decreased over the past years. APAs granted in the Netherlands cover a wide range of activities including R&D, logistics, procurement, manufacturing, sales and distribution, head office, administration, IT, and treasury/financing activities. Dutch APAs as shown above cover both UAPAs as well as BAPAs and MAPAs. In 2017, a total number of four BAPAs or MAPAs were issued and in 2018 this number increased to 16. The aim of the Dutch government is to conclude more BAPAs and MAPAs than in the past.

Poland

The first APA was issued in 2006, however the APA program for many years was limited in practice to rather few cases of very large multinational taxpayers willing to secure their major transactions.

Please see below annual statistics up to 2017, as presented by the Ministry of Finance (see https://www.podatki.gov.pl/ceny-transferowe/procedury-map-i-apa-statystyki/uprzednie-porozumienia-cenowe-apa/statystyki/):

There were eight UAPAs in progress, 13 BAPAs, and 1 MAPA. APA applications accelerated dramatically in 2018 partly due to the new restrictions of the tax deductibility of intangible transactions, which can be overcome with an APA. This acceleration is, also a result of audit activity by the tax authorities, which convinced many taxpayers to seek a vaccine against the unpredictability of the outcome of potential transfer pricing audits. The exact statistics are not yet published, however anecdotal evidence suggests that there were almost 50 applications for new APAs (UAPAs and BAPAs) in December. This means that in one month there was a greater number of new APA cases initiated than the total amount of successful APA proceedings in the years 2006-2017.

Portugal

At the end of 2017, 10 APAs were in force in Portugal. Two BAPAs have been established, one with an EU country and another with a non-EU country and eight UAPAs were in force, six of those covering transactions involving EU countries. The latest statistics that are available for Portugal are from 2017 showing the following figures.

Moreover, according to the Combat Tax and Customs Fraud and Evasion Report for 2017, 15 APAs were being negotiated, four of which were renewals, involving both UAPAs and BAPAs. The number of BAPAs has been increasing with reference to the procedures initiated in 2018 and 2019.

One may observe APAs being established and negotiated across different industries, namely by entities operating in the automobile, paper and pulp, retail apparel, telecommunications, electronics, and finance sectors, amongst others, covering different types of transactions such as purchase and sale of goods, specialized services, manufacture of goods, and financial and insurance transactions.

Spain

According to the latest data publicly available in the 2017 Tax Agency Annual Report, the ONFI participated in managing 138 APAs, compared with 129 in 2016. Of this total number, 39 were finalized, 25 new submissions were accepted, five were rejected and, in nine cases, the companies withdrew the request. Only one case was not accepted.

The APAs that were finalized in 2017 allowed for an estimated gross tax bases under the agreements of about 1.40 billion euros, which is considerably less than the 3.30 billion euros guaranteed in the APAs finalized in 2016, although in that year there were a few very significant agreements for an amount of around 1.80 billion which distorts the comparison.

In 2017, a total of 60 APAs were in force out of which eight were BAPAs, most of which with jurisdictions in the European Union (six) and 52 were UAPAs. The analysis also shows that the agreements signed in 2017 indicated that the conclusion of a BAPA or MAPA request required an average of 24 months between the date a request was officially submitted and opened and the date on which the case was finalized.

There is no public data around the number of renewals, but the first APAs have been expiring and therefore companies are renewing the old agreements. Renewals should be requested six months before the expiry date of the current APAs.

Sweden

In Sweden, only BAPAs and MAPAs are accepted. According to statistics available, between 2011 and 2015, 44 cases were submitted to the Swedish Tax Agency. The process is time consuming. For example, only three decisions were made during 2015. In 2016, 12 cases were submitted and eight APAs were accepted during the same year. The latest statistics available from 2017 is shown in the table below.

Switzerland

A BAPA procedure was initiated for 44 cases in 2016 while 35 cases were concluded during the year, taking the case inventory to 123 pending cases as on Dec. 31, 2016. In 2017, 95 BAPA cases were submitted and 60 cases were concluded, taking the inventory of total pending cases to 167 as of Dec. 31, 2017 (see https://www.sif.admin.ch/sif/en/home/bilateral/verstaendigungsverf.html).

In 2017, the majority of BAPAs between Swiss taxpayers and related parties in foreign jurisdictions under negotiation concerned European partner countries, comprising 52% of the total BAPA cases, with Asian and American jurisdictions accounting for 30% and 15%, respectively. The duration of BAPA/MAP negotiations conducted by the Swiss Competent Authorities varies depending on the case complexity. During 2017, the BAPAs closed during the year were being negotiated in a time period of 32 months on average, marking a significant decrease compared to the average duration of negotiations (43 months) in 2016.

Ukraine

Currently there are no concluded APAs in Ukraine. According to the tax authorities, two UAPA applications were filed in 2018, and are being considered for conclusion.

United Kingdom

HMRC publishes APA statistics annually within their wider transfer pricing statistics. The latest statistics were released at the end of July 2018 showing a reduced number of APA applications but an increased number of APAs agreed. Reflecting the fact that most APAs are now bilateral, the APA process takes around three years (see https://www.gov.uk/government/publications/transfer-pricing-and-diverted-profits-tax-statistics-to-2017-to-2018).

We expect the numbers of new APA applications to have increased again in the next HMRC statistics published and that HMRC will receive around 20-30 new BAPA applications each year. In addition, all EU member states contribute APA statistics to the EU Joint Transfer Pricing Forum (EUJTPF). The latest statistics published in September 2018 show that most of the U.K.’s APAs do not involve their EU treaty partners (see https://ec.europa.eu/taxation_customs/business/company-tax/transfer-pricing-eu-context/joint-transfer-pricing-forum_en).

One must note that APAs rejected are not included in the APA requests numbers. Rather they are rejected by HMRC at the Expression of Interest stage preventing a request.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

These comments represent the views of the authors only, and do not necessarily represent the views or professional advice of KPMG. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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