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How APAs can help tackle tax avoidance

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Advanced pricing agreements (APAs) have long been hailed for the certainty they provide to taxpayers and authorities. But they can also be a useful tool in tackling avoidance with sufficient transparency.

Bilateral and multilateral APAs are advantageous, assuming that all relevant entities within the multinational enterprise (MNE) group are parties to the APA and (that the APA is broad in scope and covers all possibly relevant transfer pricing issues. This, argues David Spencer, attorney and Tax Justice Network senior adviser, is because such APAs provide greater certainty, especially in complex cases, both for the taxpayer and governments. “Such bilateral and multilateral APAs should reduce substantially the risk of tax avoidance and tax evasion caused by the MNE possibly shifting income to low tax or no tax jurisdictions because the governments parties to the respective APA should be especially aware of this possible issue and the MNE knows that the relevant governments become aware, as a result of the negotiations in reaching such agreements, of the MNE's operations and modus operandi.”

Since the APA process requires disclosure by the MNE to governments of all relevant facts, the possibilities for the MNE, which has a bilateral or multilateral APA, engaging in tax avoidance or evasion should be less.

Spencer notes, however that APAs are problematic because they are negotiated agreements which normally are not available to the public and therefore contribute to the development of “secret law”. APAs with developing countries might be problematic in certain cases because of the risk of specially negotiated provisions and corruption, especially with regard to profit shifting.

“Therefore, full transparency with regard to APAs is the best protection against the risk of such potential problems,” said Spencer. “But MNEs normally would object to such full transparency or publication.”

A fixed margin or safe harbour system such as the one employed by Brazil, but with fixed margins developed on a sectorial basis for particular industries or businesses, reduces the risk of government discretion and of governments not having sufficient information, of transfer pricing problems and therefore the need for APAs. But Spencer said some flexibility within a fixed margin or safe harbour system could permit APAs in certain specific cases, such as where the fixed margin or safe harbour system only creates a presumption, which the taxpayer can rebut through the use of APAs.

“Bilateral and multilateral (but not unilateral) APAs should hinder and restrain tax avoidance or tax evasion by MNEs,” said Spencer. “But APAs themselves are not a solution to all transfer pricing problems.”

The number of jurisdictions that offer an APA programme is increasing. International Tax Review’s 12th Annual Global Transfer Pricing Forum in Paris on September 24 will look at whether they are up to the task.

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