INSIGHT: Advance Pricing Arrangement Series—Europe (Part 2)

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.

RECENT DEVELOPMENTS

Belgium

The number of BAPAs and MAPAs whereby Belgium is involved is clearly on the rise. This is a direct consequence of the increased complexity in the tax world as well as uncertainty about the likelihood of taxpayers being confronted with transfer pricing audits in key economies in the years to come.

With the Belgian competent authorities, we have noticed in recent years a clear trend to take a more firm stand and defend their points of view more vigorously towards their foreign competent authority colleagues.

UAPAs in Belgium still play a vital role in the Belgian tax landscape. The Belgian Ruling Commission takes its time to critically review the transfer pricing ruling applications being filed, but remains in a business-minded modus insofar the taxpayer and its adviser respect the OECD aligned rules of the game.

Denmark

The number of BAPA and MAP applications have increased in the past years. In 2017 the Danish competent authority was allocated more resources and it successfully concluded six BAPAs and resolved 51 MAP cases, which is the highest number of resolved cases ever and double as many resolved MAP cases compared to the previous years. On-going MAP cases at year-end were 148 which is only one case fewer than the year before. Recently, the Danish Tax Agency announced it reorganized its competent authority activities which should lead to a more focused and lean competent authority practice.

Several of the officials within the competent authority office have a background as tax inspectors. This possibly explains why they often request the applicants’ transfer pricing documentation from past years.

The competent authority does not reject the possibility of information received being passed on to the national audit team, including with regard to rejected or on-going BAPA applications.

Germany

German tax authorities are generally open to BAPA requests. However, we see that discussions about state aid, tax benefits, etc. have made them more skeptical when it comes to BAPAs with low tax jurisdictions. If such countries are in the scope of the BAPA, taxpayers should proactively demonstrate the business reasons for the intended transfer pricing structure.

Furthermore, we observe that the German tax authorities are trying to limit the number of MAPs. In this context, they analyze and implement new dispute resolution procedures like joint audits. Even if it is not the goal to limit also the number of BAPA requests, we see that BAPA applications are challenged more often. Thus, a thorough preparation of the prefiling meeting and the application is highly recommended.

Italy

During 2017 and 2018, the number of applications for UAPAs and BAPAs submitted to the APA/MAP Office (Ufficio Accordi preventivi e controversie internazionali which is competent for both UAPAs and BAPAs) continued to increase significantly. However, efficient management of the APA/MAP Office, despite limited resources, allowed the procedure to keep working, albeit with some slowdowns mainly due to the fact that the same Office of the Revenue Agency oversees both MAPs as well as the Patent Box regime (introduced in 2015).

The rising number of applications and pre-filings for both UAPAs and BAPAS, as well as the long duration of the procedures in recent years, make it clear that there is a strong need for adequate resources, such as more personnel and specialized training, in order to increase the number of signed agreements and reduce the average time to complete the procedure.

Currently the Revenue Agency is undergoing a further reorganization, resulting in the continued slowdown of pending APAs. Once the reorganization is concluded, the APA/MAP Office should function in a more rational and efficient manner.

Poland

As of Jan. 1, 2018 a limitation of tax deductibility of certain costs was introduced in the Polish Corporate Income Tax (CIT) Act. This limitation regards the cost deductibility of various intercompany charges. For example, it covers costs relating to the purchase of advisory services, market research, advertising services, management and control, data processing, insurance, guarantees and any similar services and also the fees for the use of intangible assets. The costs resulting from the above mentioned charges may be tax deductible only within the limit of PLN 3,000,000 annually (approximately USD 800,000 and EUR 700,000). This limit may be increased by the 5% of tax adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

The above mentioned restrictions do not apply to transactions for which a taxpayer obtained an APA with the Polish tax authorities. These regulations created an outburst of interest towards the APA proceedings. The Polish Ministry of Finance realized that the APA competent authority was under a serious threat of receiving an inflow of a large number of applications for APAs (both UAPAs and BAPAs) concerning purely intercompany services. This may paralyze the normal APA program. The current APA team in still relatively small, and such an increase of the number of new applications will affect the ability to proceed with the cases currently in progress, not to mention potential new APA proceedings. Therefore, an alternative solution is being considered.

The Ministry of Finance announced that it is currently working on a simplified UAPA procedure. This completely new concept will be designed for the transactions which may be affected by the limitations of the tax deductibility. According to the draft regulations, the simplified UAPA procedure would be available to cover the purchase of some low-value adding services and royalties for the right to use simple intangibles. Such UAPAs could be concluded for up to three years. There is an intention to introduce the simplified UAPAs from July 1, 2019. However, as the potential scope of transactions to which simplified UAPAs may be used is fairly limited and there are certain minimum profitability requirements to initiate the procedure and to maintain the validity of the simplified UAPAs, there is a risk that they will not be as popular as has been initially expected.

Portugal

As foreseen in the Strategic Plan to Combat Tax and Customs Fraud and Evasion for 2018-2020 Government Report, APA negotiations have been established as a priority in order to ensure predictability in the tax treatment given to certain transactions within economic groups. Indeed, an increase of the number of APAs being established with the PTA has been observed.

Spain

There are no recent developments in reference to new regulations or guidelines provided by the Tax Agency. However in practice a number of new trends are identifiable.

It is important to note that a BAPA can be negotiated in the course of a MAP request. Based on the Peer Review of BEPS Action 14 published by the OECD, the ONFI is responsive and active in competent authority procedures with a good reputation from its peer countries. Tax authorities may even express their wish to invite the company during negotiations to file a request for an APA, which is a mandatory requirement to expand the competent authorities’ conversations to the future.

The scope of the APA in Spain is not limited. Therefore, it can cover either one transaction or the overall profitability of the company. Another trend we are identifying is that there is a clear preference to cover the overall remuneration of the Spanish company more than in reference to one single transaction, unless the reference is done to a financial transaction. In particular, when the company is in a loss position, it is difficult to make progress in an APA covering only some of the transactions.

The ONFI expects the taxpayer to contribute and be open during the process. In general, the APA teams take the cases with proper consideration and companies can expect to have the cases progressing at a good speed. In particular, the authorities are interested in having information on similar APAs concluded in other jurisdictions. The lack or serious delay in responses can result in the ONFI considering that the conduct of the taxpayer does not merit having an agreement in a cooperative environment and may end up with either a rejection or an invitation for the taxpayer to withdraw the APA request.

Most of the APA officials have an audit background. This circumstance explains why normally they seek to have comfort through the request of additional information from past years.

Another circumstance that needs to be managed is the accounting principles companies use to provide data to the tax authorities. It is typical to provide data in U.S. GAAP or IFRS and this is particularly so when segregated data are needed. Spanish legislation introduced a modification in its transfer pricing provision by which data needed to be provided in Spanish GAAP. This often increases conflicts in an audit environment as sometimes the requests can be very burdensome. The APA program is extremely useful in this circumstance as tax officials are normally more open to look into the data as used by the company. However, frequently the final agreement contains a reference to the statutory accounts which can include a sort of a floor or another mechanism that combines the needs of the company while complying with the local provisions.

Sweden

The number of applications have increased in the past years and we have seen that the Swedish Tax Agency has employed more people recently. Hence, there is more focus on APAs in general now.

Switzerland

Swiss taxpayers face an increasingly complex international tax landscape, combined with a significant increase in the transparency requirements of their respective global organizations. With increased resources and information in the hands of the tax authorities, this leads to a sharp rise in transfer pricing audits globally. The Swiss tax authorities also focus on transfer pricing topics within domestic tax audits. As a consequence, Swiss taxpayers are more frequently looking into options on how to mitigate transfer pricing risks, including the use of BAPAs/MAPAs. Recent data shows that with the significant increase in the number of APA cases submitted, the number of APA cases successfully concluded has also increased. These figures show that the SIF in Switzerland tries to accelerate the processing of APA cases while at the same time prioritizing the best possible results for the Swiss taxpayer.

KEY TAKEAWAYS

Belgium

Key to success for obtaining BAPAs/MAPAs in a smooth way is managing the communication lines between the various competent authorities and the taxpayers.

Especially in Belgium’s small and open economy, where the department of the tax authorities that handles the BAPAs/MAPAs is rather small in size and has to operate in a lean and efficient way in order to make optimal use of its limited resources, it is crucial that all procedures and corresponding deadlines are being respected and that all involved competent authorities are informed in a similar way, regarding content, underlying documentation and timing.

The same applies for UAPAs. Transparent ways of communicating between the taxpayer and the Belgian Ruling Commission, as well as between the Belgian ruling authorities and their foreign counterparts, are key to achieving an outcome that will survive the test of time.

Denmark

Key to success for obtaining BAPAs and MAPAs as smooth as possible, is managing the process in a proactive way, keeping communication lines between the various competent authorities and the taxpayers transparent.

Portugal

Due to the complexity and the potential for conflicts that may arise between taxpayers and tax authorities, special attention should be given to the business model and the allocation of profits between the parties. UAPAs, BAPAs, and MAPAs can offer certainty that the tax authorities will accept the selected transfer pricing methodology to be used for related-party transactions over a fixed period of time, and this will result in the elimination or reduction of double taxation. MAP backed by arbitration, as provided in the Double Tax Treaties (currently, the only Portuguese treaty containing MAP arbitration is with Japan) or the EU Arbitration Convention procedure may eliminate or reduce any double taxation, however the processes are as a rule much longer than those carried out through an APA.

The successful conclusion of an UAPA or BAPA/MAPA depends mainly on the communication established with the PTA. Transparency and cooperation are a must. When initiating an APA, we recommend attending a meeting with the PTA at the preliminary phase to provide the framework of the business and also to evaluate the information, documentation, and transfer pricing analysis to be provided by the taxpayer to the PTA. Further meetings are also recommended with the PTA as necessary, even during the competent authority negotiation phase.

Germany

Uninterrupted flow of information among the tax authorities involved and the taxpayers, timely coordination, and an APA process free of interruptions are the decisive factors for a successful conclusion of the BAPA procedure. This is especially true in Germany, as under the federal structure of the German tax authorities, the German BAPA team usually consists of the Competent Authority team, the local field tax auditors and the federal tax auditors. Furthermore, while there was an increase in hiring on the Competent Authority level, the capacity is still limited given the same department has to deal with a high number of MAP cases.

Italy

The procedure for the conclusion of both UAPAs and BAPAs requires a high degree of collaboration between the tax administration and the taxpayer as well as a significant disclosure of information by the taxpayer. It is crucial that all procedures and corresponding deadlines are being respected and that all involved competent authorities are promptly and fully informed regarding content, underlying documentation and timing.

Underlying the APA procedure, is a relationship of transparency, trust and collaboration between the tax authorities and the taxpayer that can never fail without causing the extinction of the procedure.

For an MNE, it is often worth making this effort of transparency and mutual cooperation in order to build a reliable tax framework, prevent potential transfer pricing disputes, and reduce the risk of international double taxation.

Poland

In the past, Poland was known as a country where discussions with the tax authorities had always been difficult. The unwritten rule was to keep the contact with the tax office to an unavoidable minimum. For this reason the initial reaction for introduction of the APA possibility into the Polish legal system was rather skeptical. Only few perceived APAs as an opportunity.

As the statistics show, the APA program began very slowly. It was difficult to change the perception of the taxpayers and see a partner where it used to see an antagonist. However over the years, the APA competent authority gained a certain level of confidence from taxpayers. Moreover, in the present times of rather aggressive approaches from the tax offices focused mostly on tax collection, APAs are seen predominantly as a defense measure to secure the transaction and avoid problems.

The post-BEPS era of tax transparency and exchange of information brings yet new challenges. Increasing scrutiny of the conditions of doing business with related parties and in depth analyses of arm’s-length nature of the transactions, raises even higher the attractiveness of the APAs (especially BAPAs). Most recently, the APA program in Poland gathered an unexpected momentum due to the introduction of restrictions on the tax deductibility of certain related party costs. It appears that after more than a decade of APAs being used rather selectively, they will be finally utilized more frequently.

Netherlands

Companies can obtain certainty with respect to potential tax and transfer pricing consequences of entrepreneurial decisions in advance. The aim of APAs is to grant all Dutch taxpayers, including multinationals, certainty within the boundaries set by Dutch tax law, tax treaties and OECD guidance.

The Dutch APA practice was changed effective July 1, 2019. In the new practice, the current substance requirements will be replaced by the requirement of economic nexus in the Netherlands. Under the new policy, there will be a publication of tax rulings.

The new APA and ATR procedure, effective 7/1/19, imposes a new disclosure requiring the publication of summary reports on every APA issued, but also of every APA request rejected. We can expect greater scrutiny of APA requests and no advance certainty on certain types of intercompany transactions for which an APA was previously possible. The new International Tax Certainty Board has been set up, also effective 7/1/19.

Spain

Companies can rely on the APA program in Spain when the case is solid and reasonable. Companies should be ready to be proactive and responsive during the process. The length of the process is normally reasonable when well managed. Spain has a history of ensuring that their APAs are principle-based. Therefore bilateral as well as unilateral APAs have an arm’s-length basis. The audit environment is aggressive. Therefore managing risk upfront through an APA, especially with regards to transactions that take place indefinitely can be a good option to consider.

Switzerland

The SIF has taken continuous steps to improve dispute resolution mechanisms for Swiss taxpayers in ensuring a smooth APA procedure. Free lodgment of applications, easy and reliable access to the APA team, and a relatively informal communication style ensure that the Swiss Competent Authorities are efficiently working on decreasing the duration to conclude an APA for Swiss taxpayers, despite a significant increase in the caseload.

United Kingdom

The BAPA program in the U.K. is well-established. The most common treaty partners for APAs currently are the U.S., Japan, and India, although HMRC agrees to APAs with a wide range of treaty partners. HMRC’s Statement of Practice sets out the required information but the specific information required for each case is best discussed with HMRC at the Expression of Interest stage. Key, particularly post-BEPS, is that sufficient focus is given to people functions across the value chain in the functional analysis.

This article was updated to reflect the new Dutch APA practice that became effective July 1, 2019.

Appendix: Statistics on APAs in the EU at the End of 2017^*

*EU Joint Transfer Pricing Forum, Statistics on APAs in the EU at the End of 2017, Meeting of Oct. 24, 2018.

To see this appendix in a new window click here.

To see a PDF of this appendix click here.

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.

KPMG is one of the world’s leading professional services firms, providing innovative business solutions and audit, tax, and advisory services to many of the world’s largest and most prestigious organizations.

KPMG LLP is the independent U.S. member firm of KPMG International Cooperative (KPMG International). KPMG International’s independent member firms have 207,000 professionals working in 153 countries and territories.Learn more at www.kpmg.com/us.

AUTHORS