10 de mayo de 2024

The Advance Pricing Arrangements as a “co-operative compliance” expression

Manuela Londoño, who is currently a research assistant at the University Externado of Colombia, explains and analyzes the benefits of Advance Pricing Arrangements.

Manuela Londoño Cortes 

Lawyer and research assistant at the University Externado of Colombia 

In controlled transactions, taxpayers can request to start an advance pricing arrangement (APA) process in order to get an arrangement with their associated enterprise (or enterprises), and the tax authority (or “authorities” in multilateral APA); During this process, they can determine “an appropriate set of criteria (e.g., method, comparable and appropriate adjustments, critical assumptions regarding future events) for determining transfer pricing for those transactions over a fixed period of time (Organization for Economic Cooperation and Development [OECD], 2022, p. 14). As it can be inferred from its name, the essence of the APA process lines in reaching an arrangement before the execution of the controlled transaction. By providing advance tax certainty, APAs help to prevent transfer pricing disputes based on criteria selected by the taxpayer, as well as it helps to reduce potential double taxation (OECD, 2022, p. 16-17). 

The APA process is voluntary, requiring taxpayers to disclose sufficient and meaningful information regarding their operations, while tax administrations commit to making transfer pricing adjustments once the arrangement is reached and properly implemented[1]. This implies the existence of fluent communication and means for appropriate interaction. In that sense, the process requires transparency and trust between the administration and the taxpayer, fostering an environment of increased transparency and trust. 

Due to those characteristics, the APA process should be regarded as an expression of “co-operative compliance”: the co-operative relation between tax administrations and taxpayers aimed at ensuring tax compliance (OECD, 2013, p. 14). Through the APA process, the compliance risk related to transfer pricing rules is diminished by establishing adequate and mutually agreed parameters for determining transfer prices.

As a manifestation of co-operative compliance, the APA process is immersed in the change of vision of the administration’s role in relation with taxpayer compliance. This shift consists in the passage of an adversarial and based on power model, in which the communication between tax administrations and taxpayers is almost minimal, often occurring only close to compliance deadlines; instead, it embraces a model based on transparence and trust, fostering fluent interaction between both, and wherein the administration assists taxpayer compliance efforts (Alonso Arce et al., 2021, p. 54-56). This change in mindset yields benefits to both parties, but that implies leaving the belief that there are contrary and irreconcilable positions between administrations and taxpayers.

Properly applied, APAs can be a tool for improving voluntary tax compliance and tax certainty. Additionally, they can make more efficient tax administrations’ functions, allowing them to concentrate their efforts in those taxpayers about whom it possesses less information and who represent a greater risk. 

[1] The APA Manual (OECD, 2022, p. 14) establishes that: “At the conclusion of the APA process, tax administrations provide confirmation to the taxpayer(s) that no transfer pricing adjustment will be made to the covered transaction(s) for a given period if the taxpayer follows the terms of the APA”.

Alonso Arce, I., Merino Jara, I., Aneiros, J., Armentia, J., Aróstegui, M., Arrasate, P., Beñarán, Á., Calvo, J., Cámara, M. del C., Gómez, J., González, F., Gutiérrez, M., Lacunza, J., Durán, M. L., Medina, A., Olivares, B. D., Orena Domínguez, A., Otaegi, I., Romero, S., … Zarraonandia, I. (2021). El control de los riesgos fiscales en la empresa a través del compliance tributario. CISS.

Organisation for Economic Cooperation and Development. (2013). Co-operative Compliance: A Framework. OECD.

Organisation for Economic Cooperation and Development [OECD]. (2022). Bilateral Advance Pricing Arrangement Manual .