Transfer Pricing Alert – Is an Advance Pricing Agreement (“APA”) suitable for you?

An APA is a dispute prevention facility under which the Inland Revenue Authority of Singapore (“IRAS”) and the taxpayer or relevant Avoidance of Double Taxation Agreement (DTA) partner agree in advance on a set of criteria to ascertain the pricing of a taxpayer’s related party transactions for a specific period of time.

It is one of the best measures to mitigate tax risks arising from transfer pricing and provides certainty regarding the tax treatment of related party transactions. To learn more about APA and the relevant application procedures, read our article on “Transfer Pricing Alert - Advance Pricing Agreement (APA)”.

As the APA process can be time-consuming and resource-intensive, taxpayers should evaluate their unique situations and consider applying for an APA if the transfer pricing risks for their related party transactions are high and/or the value of said transactions are material.

Five Steps to assess whether you should apply for an APA:

Determining whether an Advance Pricing Arrangement (APA) or a Bilateral Advance Pricing Arrangement (BAPA) is suitable for a taxpayer’s business involves a careful assessment of various factors as follows:

1. Understand your business and the related Transfer Pricing Risks -
A taxpayer needs to understand and assess the significance of related party transactions in its overall business operations and the potential transfer pricing risks associated with them. The assessment carried out should consider not only the potential tax costs but also the associated financial and operational costs and impact.  

One needs to conduct a comprehensive cost-benefit analysis to compare the expected costs of applying for and maintaining an APA (including legal and consulting fees, internal resources required to gather information for the application and coordinate matters throughout the application process, and also compliance costs in completing and submitting the annual compliance report) with the potential benefits, including but not limited to, reduced tax uncertainty, compliance, and dispute resolution. 

2. Assess the alternative strategies -
The taxpayer will need to consider whether having certainty in its transfer pricing arrangements is essential for its business operations.  

APAs and BAPAs are particularly beneficial for businesses that:

• Value predictability in their tax positions for related party transactions; or
• Want to reduce compliance burdens (For example, time spent responding to IRAS’ queries or appeals made on views taken by IRAS, as well as on potential surcharges that may be imposed for transfer pricing adjustments made by IRAS); or 
• Have complex transfer pricing structures that could lead to disputes with IRAS.

The taxpayer may explore alternative strategies to mitigate transfer pricing risks, such as improving internal transfer pricing documentation, implementing best practices, etc., that may offer similar solutions to the taxpayer’s transfer pricing issues without the constraints of an APA.

3. Evaluate the Complexity of Transactions -
APAs are more suitable for related party transactions that involve intricate/complex pricing arrangements or where there are material related party transactions, resulting in significant transfer pricing risks. Simple and straightforward transactions may not require the level of formalised agreement provided by an APA.

4. Review the track record of Transfer Pricing Compliance -
A history of disputes with IRAS or other tax authorities on transfer pricing matters may indicate that an APA or BAPA could be beneficial in providing a clear framework for future transfer pricing compliance.  As such, the taxpayer should examine its history of transfer pricing compliance and take note of the number of disputes and/or adjustments made by the tax authorities to date.

The taxpayer needs to assess whether its current transfer pricing policies and methodologies are defensible and can withstand scrutiny. Identification of any gaps or inconsistencies in its transfer pricing documentation is crucial.

5. Consider Jurisdictional Risks -
Where the taxpayer’s business operates in multiple jurisdictions, consideration must be given to the varying transfer pricing regulations and enforcement practices in each jurisdiction. An APA or BAPA may be more valuable in jurisdictions where transfer pricing risks are higher or where tax authorities are particularly aggressive in enforcing transfer pricing rules.

Ultimately, the decision on whether applying and obtaining an APA or BAPA is appropriate will depend on each business’ unique circumstances, transfer pricing risks, and goals the taxpayer aims to achieve.

If you believe that an APA or BAPA is appropriate, you will need to be prepared to engage in several discussions with the relevant tax authorities. Open and transparent communication is essential in the APA/BAPA negotiation process. Be prepared to provide detailed information about your business operations and transfer pricing methodologies.

It is advisable to consult with experienced tax advisors to thoroughly evaluate the transfer pricing requirements of the company or Group of companies. They can help assess the appropriateness of an APA or BAPA for the company’s specific situation, provide insights into potential benefits and challenges, and give guidance throughout the entire APA application process until agreement is obtained from the relevant authorities. Early engagement with tax authorities is recommended for complex transfer pricing transactions.

RSM’s strong global presence and technical experience allow us to help you proactively assess and devise an overall strategy, which may or may not require an APA, in relation to any cross-border tax controversies.