The Advance Pricing Agreement (APA) annual report for 2019 has recently been released, providing insights into the progress made in the implementation of APAs in various countries. The report highlights the growing importance of APAs as a tool for taxpayers and tax authorities to mitigate transfer pricing risks, promoting tax certainty and reducing disputes.
For those unfamiliar with APAs, they are agreements between a taxpayer and a tax authority that establish the transfer pricing methodology to be applied to cross-border transactions. By agreeing on a methodology in advance, both parties can avoid transfer pricing disputes, which can be time-consuming and costly.
According to the report, the number of APAs signed worldwide increased in 2019, with a total of 1,335 APAs signed since the program`s inception in 1991. The majority of APAs signed in 2019 involved the United States, Japan, and Canada. Furthermore, the report notes that an increasing number of taxpayers are seeking bilateral or multilateral APAs, which involve multiple tax authorities and provide additional benefits such as greater tax certainty and reduced compliance costs.
In terms of industries, the report reveals that the manufacturing and wholesale/retail industries continued to dominate the APA program, accounting for 62% of all APAs signed in 2019. However, the financial services industry saw an increase in the number of APAs signed, reflecting the growing importance of this sector in the global economy.
The report also sheds light on the average time it takes to conclude an APA, which can vary significantly depending on the complexity of the case and the number of tax authorities involved. In 2019, the average time to conclude a bilateral APA was 31 months, while the average time for a unilateral APA was 22 months.
Overall, the APA program continues to be an important tool for taxpayers and tax authorities to manage transfer pricing risks and promote tax certainty. By providing a framework for taxpayers and tax authorities to agree on transfer pricing methodology in advance, APAs can help reduce disputes and contribute to a more stable and predictable tax environment. As the global economy becomes increasingly interconnected, it is expected that APAs will continue to play a crucial role in international tax compliance.
