Transfer pricing perspectives: Winds of Change - PwC

As more transactions involve Singapore asa location for MNC headquarters or tradinghubs, Singapore will increasingly be a partyto issues of double taxation that may arisein the region. One strategy to manage thiscould be to use the Mutual AgreementProcedures (MAPs) in the event that the taxauthorities of Singapore’s trading partnersattack such business restructuring. Thismay be a reactive approach to managingdouble taxation which does not provideupfront certainty to MNCs and their taxdirectors. In such cases, APAs could beused as an alternative or complimentarystrategy to apply a proactive approachto seeking certainty and managing thetransfer pricing risks associated withbusiness restructuring. The attractivenessof APAs is also enhanced by the fact thatIRAS has historically shown a willingnessto adhere to the principles outlined in theChapter IX of the OECD Guidelines, onbusiness restructuring.MNCs could take advantage of theopportunity this presents to manage theirtransfer pricing risks and the potential fordouble taxation by opting for bilateral APAswith countries who also have experiencein dealing with bilateral APAs, such asJapan or Australia. In these jurisdictions,the revenue authorities, in principle, bothfollow the guidance outlined in Chapter IXof the OECD Guidelines. MNCs may alsoconsider using the bilateral APA mechanismas an option to resolve related tax issuessuch as exit taxes on conversion of thebusiness models. In adopting this strategy,MNCs should equip themselves with robusttransfer pricing and tax analysis if theyare willing to use the APA mechanism toresolve potential issues.While MNCs can consider applyingfor APAs to deal with a change in thebusiness structure, APAs can also be usedeffectively to gain certainty on existingstructures for future years where businessand transfer pricing models are prone tochallenge by tax authorities. In doing so,there is also a potential to resolve issuesarising in years prior to the APA. Thenew APA programme introduced by theAustralian Taxation Office under PracticeStatement Law Administration ‘PSLA2011/1’ earlier this year for example,indicates that such opportunities may beavailable to taxpayers, where the facts andcircumstances are sufficiently similar, andtherefore methods and outcomes agreedunder an APA may be used to resolveissues arising in years prior to the APA. Infact, the newly released programme hasreignited, with the encouragement of theAustralian Taxation Office, the interest ofAustralian taxpayers in APAs as a potentialsolution to their transfer pricing and relatedtax challenges after a number of years ofreduced confidence in the programme.In spite of this, it is still challenging tonegotiate a bilateral APA successfullywithout proper preparation and carefulmanagement of the discussions with taxauthorities. As is the case for MNCs, taxauthorities also need to commit significantresources to bilateral APA negotiationsand accordingly, a commitment to provideadequate support and cooperation isrequired from the taxpayers.Unfortunately bilateral APAs are notthe answer to all transfer pricingconcerns. Many MNCs who have tried tonegotiate bilateral APAs in China havebeen frustrated by a long pipeline ofAPA applications for consideration bythe Chinese Competent Authority (CA)due to the increased demand for APAsfrom Chinese taxpayers in recent years.The APA programme has long passedthe “infant stage” and all the teethingproblems associated with that, and israpidly growing in popularity. Therefore,the State Administration of Taxation (SAT)has become highly selective in acceptingAPA applications and taxpayers now needa creative and compelling strategy to givetheir case some priority.Similarly, the National Tax Agency (NTA)in Japan also has a large inventory ofbilateral APA cases, and the number ofsubmissions annually continues to increase(partly due to increasing numbers ofAPA renewal applications). In order toaddress this increasing inventory, theNTA has implemented accelerated reviewof APA applications and, additionally, isreaching agreement on bilateral APAswith treaty partners in fewer meetingsthan historically.Transfer Pricing Perspectives. October 201161