Advanced Pricing Agreements (APAs)

Advanced Pricing Adjustments legislations

The Ministry of Public Finances and National Agency for Tax Administration (ANAF) as per Government Decision no. 529/2007 introduced Advanced Pricing Adjustments legislations in June 2007. This legislation allows large taxpayers with a consolidated value of transactions of more than EUR 4 million the option to enter into APA (for a maximum term of five years) on payment of an initial fee of EUR 20,000. For other taxpayers having transactions lesser than the aforementioned threshold, the initial fee to enter into an APA is EUR 10,000. Further, this legislation also allows for the two categories of tax payers to amend their initial APA application on payment of EUR 15,000 (for large taxpayers) and EUR 6,000 (for other taxpayers) respectively.

Advance Pricing Agreement

An APA as referred to by the Organization for Economic Development (OECD) in its 2010 transfer pricing guidelines is “an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time”.

Tax payers have the option of entering into different types of APAs, namely a Unilateral APA, a Bilateral APA (BAPA) or a Multilateral APA (MAPA depending on the pattern of their related party transactions.

Merits of an APA mechanism

  • Obtains certainty for complex, high risk transactions – An APA can be undertaken by companies that have complex related party transactions; high degree of transfer pricing adjustment risk that may result in penalties. It is also relevant for companies that desire for certainty with regard to their transfer pricing policies.
  • Avoids double taxation – The pricing of goods and services within a multinational group is governed by a global pricing policy. The policy ensures to provide an arm’s length return to various constituents of a multinational group, based on the functions performed, assets employed and risks assumed by each member of the group. Whenever a revenue authority in a particular jurisdiction challenges and disputes such a pricing policy and raises questions, it might lead to double taxation for the multinational group. The process of APA also seeks to do away with these tax risks.
  • Reduces compliance costs – Reduces compliance cost and costs associated with audit and appeals for the tenure of the APA by eliminating the risk of transfer pricing audit and resolving long drawn and time-consuming litigations.
  • Reduces the burden of record keeping – Reduces the burden of record keeping, as the taxpayer knows in advance the required documents to be maintained to substantiate the agreed terms and conditions of the APA.
  • Competent authority guides in negotiating – Competent authorities possess the knowledge of negotiating with the other country and guides the case from the outset.