4.1 This Chapter considers the main stakeholder concerns with the Australian Taxation Office's (ATO) Advance Pricing Arrangements (APAs) and Mutual Agreement Procedures (MAPs). These stakeholder concerns are described immediately below, followed by a description of the relevant ATO material. The Inspector-General of Taxation's (IGT) observations are provided at the end of this chapter together with relevant recommendations.
4.2 Overall, stakeholders supported APAs and preferred them over transfer pricing audits as they view APAs as potentially limiting the adverse impact on taxpayer resources and associated costs involved in dealing with ATO compliance activities. Stakeholders also support the aims of the MAPs to reduce double taxation.
4.3 Stakeholders positively commented on the co-design process for APAs following PricewaterhouseCoopers' (PWC) Review of the Advance Pricing Arrangement Program in 2008 (2008 APA Review). However, notwithstanding the changes arising from this co-design process, they considered a number of concerns remain which have increased financial and business opportunity costs due to the time and resources expended, particularly in relation to bilateral cases.
4.4 Stakeholders commented that the ATO concludes simpler APAs cooperatively and relatively efficiently. However, they considered that ATO officers appeared to treat the APA process as a quasi-audit for many large business unilateral and bilateral APAs. Fundamentally, they considered for these large business APAs:
- the intensity of information gathering was more akin to that experienced in an audit and disproportionate to taxpayers' risk profiles, including uncertain relevance; and
- ATO officers were less willing to discuss their concerns and work with the taxpayer to identify the information that could resolve those concerns.
4.5 Stakeholders commented that the above approach tended to dissuade taxpayers from entering into APAs as the process imposes considerable compliance costs and extended timeframes. In fact, some overseas tax directors and tax managers consider the United States' (US) Inland Revenue Service (IRS) and ATO as the most difficult revenue authorities in terms of APA negotiations, due to their 'micro approach to checks and approving APAs'.494
4.6 Stakeholders consider that the streamlined APA approach for Small and Medium Enterprises (SME) has shortened timeframes and reduced compliance costs for these taxpayers. However, they observe that the overall timeframes for concluding APAs have significantly increased over the last five years with some taking up to six years, leading some taxpayers to abandon the process. Stakeholders observe that although the process of the ATO analysing APA proposals and their terms is generally efficient, substantial delays can occur after substantive agreement has been reached on key points.
4.7 Stakeholders noted that the 2008 APA Review had made a number of recommendations to improve timeframes, amongst other things. Although they consider the ATO's subsequent redesign of the APA framework in Practice Statement PSLA 2011/1 was a resulting improvement, they are concerned that other APA review recommendations have not been appropriately addressed, such as centralisation of the APA function and implementation of the 'stage and gate' approach for APAs. Whilst the ATO provided an update to the Large Business Advisory Group (LBAG), stakeholders consider that it was not a comprehensive briefing update on the APA program.
4.8 In relation to MAPs, stakeholders were concerned with the extended timeframes for negotiations between Competent Authority Representatives (CAR), and the subsequent enquiries that those discussions generated. They also questioned the need for the ATO to obtain further detailed information during MAPs, as the ATO had already obtained considerable information during the earlier audit or APA process.
4.9 Stakeholders also raised concerns with independence of the ATO's CARs who appear to have taken a less active role in the APA and MAP processes. Stakeholders attribute this to the ATO reducing the number of its CARs to three in number and drawing on its operational case officers who may be less independent. Accordingly, stakeholders consider it highly likely that the effectiveness and efficiency of bilateral negotiations is likely to substantially decrease and risk Australia's good record in relieving double taxation.
4.10 Some stakeholders raised particular concerns that recent reductions in the ATO's travel budget has also delayed the resolution of APAs and MAPs. Although alternative communication channels are available, meetings in person are more effective particularly when dealing with some jurisdictions.
4.11 A number of other issues were raised that related to the clarity of the roles and responsibilities of different units, resourcing and budgetary constraints, and ATO officers' capability. These issues have been considered in Chapters 2 and 5.
ATO materials and information
4.12 The ATO's staff instructions, Practice Statement PSLA 2011/1, indicate that a 'cooperative approach' should be taken in the APA process.495 However, the ATO advises that where APAs are complex, involve novel arrangements or large sums of money, it needs to examine the underlying transactions and their tax consequences before the terms of an APA can be agreed. This is due to the administratively binding nature of APAs.496 In this respect, the ATO's expectation is that its officers will undertake a 'critical analysis of the APA application rather than undertaking original work to establish the arm's length outcome'. However, the ATO indicates that officers 'may choose to undertake original work in some circumstances'.497
4.13 The ATO recognises the need for judgment in certain cases with regard to the scope of APAs. While there is a preference for APAs to cover all of an entity's international related party transactions, the ATO understands the need for flexibility in its approach. Further, the ATO recognises that an all-encompassing approach may be considered inconsistent with its Risk Differentiation Framework.498
4.14 For complex APAs, the ATO expects the taxpayer to 'provide information/documentation commensurate with the complexity of the arrangement and the level of risk' and that 'some topics may require detailed examination'.499 However, in this event, the ATO expects its officers to 'explain the relevance of additional information requested and how it relates to the APA application' so that the taxpayer understands the purpose and reasons for the requests.500
4.15 The ATO's Practice Statement PSLA 2011/1 also outlines what information the ATO may gather during the APA process such as:
- related parties involved in the APA;
- the term of the APA;
- covered international related party dealings;
- functional analysis;
- industry analysis; and
- selection and application of the transfer pricing methodology.501
4.16 The ATO's expected timeframes for completing the different types of APAs are set out in the following table:
|Types of APA products||Unilateral||Unilateral||Bilateral||Unilateral/ Bilateral|
|Target cycle time for a typical APA from pre-lodgement to finalisation (months)||9||12||18 — 24||24|
Source: ATO, ATO^s Advance Pricing Arrangement Program, PS LA 2011/1, 7 May 2012, para .
4.17 In addition to the above timeframes, the ATO expects that the pre-lodgment phase will take between one to three months depending on the type of APA product.
4.18 Further, the ATO can agree with the taxpayer to a different timeframe for the APA upfront, based on the issues that need to be resolved and the information required to come to an agreement.502
4.19 Data provided by the ATO in respect of APAs completed in the Large Business and International (LB&I) business line between the 2006 and 2012 calendar years is:
|Activity||Number of cases||Service standard||Number exceeding service standard||% exceeding service standard||Max. time (days)||Min. time (days)||Avg. Time (days)|
|IT APA ACR HV||255||60||45||18%||268||1||48|
|IT complex APA||6||720||0||0%||617||17||208|
|IT Large APA pre-lodgment||43||365||6||14%||707||1||205|
|IT simplified APA||2||270||1||50%||404||200||302|
|IT standard bilateral APA||7||720||0||0%||622||43||383|
|IT standard unilateral APA||16||360||6||38%||493||36||261|
|Large APA rollover||35||730||4||11%||1154||5||447|
Source: IGT analysis of ATO data.
4.20 It should be noted that the ATO estimates that between 1 July 2011 to February 2013, 20 APAs have been abandoned in the large market.
4.21 The data503 in the table above, indicates that over the last six years, the LBI business line has exceeded its benchmark service standards in 19 per cent of all APA cases (89 of 458 cases), including:
- 38 per cent of standard unilateral APA cases (6 of 16 cases); and
- 28 per cent of large APA cases (26 of 93 cases).
4.22 It should also be noted that whilst the ATO's APA Program update indicates that the pre-lodgment phase should take up to three months, it appears that the ATO's internal service standard is one year.
4.23 Similarly, the data for the SME business lines is:
|Activity||Number of cases||Service standard||Number exceeding service standard||% exceeding service standard||Max. timeframe (days)||Min. timeframe (days)||Avg. Time (days)|
|IT APA ACR HV||183||60||14||8%||286||0||29|
|IT Large APA pre-lodgment||36||365||3||8%||750||0||193|
|IT simplified APA||25||270||4||16%||394||1||186|
|IT standard bilateral APA||6||720||0||0%||444||108||282|
|IT standard unilateral APA||10||360||2||20%||451||74||200|
|Large APA rollover||15||730||1||7%||857||39||256|
|SME APA rollover||158||60||31||20%||352||0||48|
Source: IGT analysis of ATO data.
4.24 It should be noted that the ATO estimates that between 1 July 2011 to February 2013, three APAs have been abandoned in the SME market.
4.25 The data504 in the table above indicates that, over the last six years, the SME business line has exceeded its benchmark service standards in 15 per cent of all APA cases (75 of 506 cases), including:
- 42 per cent of SME APA cases (19 of 45 cases); and
- 20 per cent of SME APA rollover cases (31 of 158 cases).
4.26 A more in-depth ATO analysis of a sample of APAs shows:
- There can be ATO and taxpayer delays in commencing work on APAs. For example, there can be periods of up to 6.5 months from when a taxpayer first notifies the ATO of its intention to enter into an APA (beginning of the pre-lodgment phase) and when the ATO commences action, such as meeting with the taxpayer or requesting further information. In one case, the initial APA meeting was held 6 months after the taxpayer first notified the ATO of its intention to enter into an APA, with an additional 6.8 months before the ATO issued its first information request.
- The pre-lodgment step in APAs can take up to 750 days, but is sometimes followed by a short application phase.
- The APA teams' timeframes in which it gathers information can vary, from 8.3 months to over 44 months. The latter case, however, required the engagement of external consultants.
- There can be a wide variation in the timeframes for engagement and output of reports from the Economist Practice. For example, in one case, teams received the Economist Practice Report after 18.7 months. In another example, however, the Economist Practice was engaged in the first week of the taxpayers' initial notification of their intention to enter into an APA.
- There can be delays in the finalisation of APAs once the formal APA application is submitted to the ATO. For example, there can be a period of a further 9.6 months in finalising the APA once the formal APA application is received.505
4.27 The ATO has advised that it seeks to ensure the timeliness of APAs by giving APA case leaders responsibility for actively managing the case and by ensuring milestones and timeframes are met within the case plan. The case plan has a structured timeline and work plan. It is a 'live' document that can be modified as needed in consultation with the taxpayer. The ATO expects the APA case leader and the Transfer Pricing Review Panel (TPRP) to ensure case plans are adhered to at key milestones in the APA process.506 If timeframes are slipping, the APA case leader has authority to escalate any significant blockers and delays to senior officers for resolution.507
4.28 Additionally, collateral issues are expected to be processed in parallel with the APA where possible and dealt with under the case plan. If the collateral issue is not being dealt with directly by the APA team, the APA case leader is expected to liaise directly with the officer responsible for resolving the collateral issue to ensure that they are aware of the agreed timeframe and endeavour to meet it.508
4.29 The ATO has previously expressed reluctance to certain recommendations aimed at closing off issues at various stages in the APA process, such as a 'stage and gate' process.509 It considers that such a process 'cannot be so rigid' and 'that it would undermine the integrity of the APA Program'.510 It advises that its main concern is that the community would not expect the ATO to be precluded from reviewing prior matters where it later obtained a greater understanding of taxpayers' arrangements and their tax effect.
4.30 However, where there are delays, the ATO advises that it has extended the APA period to ensure that the taxpayer receives certainty for several years in advance. However, this flexibility may be constrained where agreement is also required from another revenue authority.
4.31 In relation to the timeframes for MAPs, the ATO aims to complete these processes within two years.511
4.32 The ATO's data for MAPs completed between the 2006 and 2012 calendar years is:512
|Business line||Activity||Number of cases||Service standard||Number exceeding service standard||% exceeding service standard||Max. time (days)||Min. time (days)||Avg. Time (days)|
|LBI||Mutual agreement procedures||40||730||12||30%||1754||23||559|
|SME||Mutual agreement procedures||1||730||1||100%||804||804||804|
Source: IGT analysis of ATO data.
4.33 As shown in the above table, most MAPs are in the LB&I business line. Almost one-third of LB&I MAPs exceeded the ATO's service standard and there can be significant variation in completion times (between 23 to 1754 days).
4.34 It should be noted that between 2004-05 and 2011-12, the Organisation for Economic Co-operation and Development (OECD) data shows that six ATO MAPs have resulted in double taxation during this time.513
4.35 The ATO has advised that it also plans to introduce MAP case plans which are agreed with taxpayers and the other revenue authorities. These case plans are intended to include timelines for key stages of the MAP process and some form of senior revenue official call-over process if agreed timelines are not met.514
4.36 Bilateral and multilateral APAs involve other revenue authorities. Whilst the ATO generally uses it best endeavours to achieve the planned timeframes, it cannot dictate precise timeframes to the other revenue authority who have their own processes, resource constraints and priorities. In this respect, the ATO is involved with the OECD Forum on Tax Administration's (FTA) project on MAPs, which is seeking to improve the effectiveness of the process.515
4.37 Bilateral APAs and MAPs require the ATO's CARs to negotiate with their overseas counterparts to relieve double taxation in a manner that looks for 'appropriate opportunities to compromise' and 'reach satisfactory resolution of the issues'.516
4.38 The ATO has advised that up until 2011, a CAR's role involved a substantial amount of time to understand and test each party's position, such as the evidence of the key profit drivers underlying taxpayers' international related party dealings.517 The time spent depended on the complexity of each case and the experience of the CAR. By way of example, potentially half of the more senior CAR's time could be taken up on the most complex cases for a period between one to two years.518
4.39 The ATO's review of the Internationals unit in 2010, however, found that the CAR should take more of a supervisory role and build the capabilities of operational officers. As a result, the ATO is currently considering an internal proposal to centralise the APA and MAP leadership function in Brisbane. Case work will be completed at a number of sites by officers from operational areas and the Economist Practice, with CAR oversight.519
4.40 The ATO has stated publicly in its former National Tax Liaison Group (NTLG) Transfer Pricing Sub-group that it will ensure the most suitable people with the appropriate skills and experience are placed on each APA and ensure all case leaders assigned to an APA are accredited.520
4.41 The ATO is aware that these changes raise concerns with the potential impacts on the Competent Authority function. However, it maintains that independence will not be affected and is further maintained through:
- the processes outlined in Practice Statement PSLA 2011/1 and the various ATO taxation rulings on transfer pricing and the application of the arm's length principle;
- the role of the Economist Practice to ensure that the appropriate arm's length methodologies are both chosen and applied; and
- its quality assurance processes, such as the role of the TPRP.521
4.42 In terms of the staff resourcing required to resolve bilateral APAs and MAPs with overseas CARs, the ATO estimates the following are required during 2013:
- CARs — 3 FTE staff — $360,000; and
- Operations/Economist Staff — 12 part-time staff — $500,000.522
4.43 The ATO has advised that CARs travel for a few purposes. There is a need to maintain productive relationships with the overseas counterparts, as well as establish new relationships when there are personnel changes. Bilateral APAs are discretionary and therefore substantially affect travel priorities. The ATO advises that the current priorities are Japan, US, China, Singapore and Korea. The travel plans for the current year involve all five of the above countries. Trade with Canada and Europe are both relatively small so the ATO cannot justify a face-to-face meeting at this point in time.
4.44 The ATO's 2012 cases involving CARs, including bilateral APAs and MAPs is:
|Jurisdiction||Cases on hand 1 Jan 2012||Cases on hand 31 Dec 2012||Cases Completed 2012|
|Rep. of Korea||5||4||2|
Source: ATO Draft Map Strategy 2013.
4.45 The ATO's proposed CAR travel program for 2013 is:
|Jurisdiction||Last visit to Australia||Last visit by Australia||Proposed next visit to Australia||Proposed next visit by Australia||No. of Delegates||Indicative Cost|
|Japan||October 2012||June 2011||June 2013||April 2013||2||$20,000 for both Japan and Korea|
|Korea||December 2011||July 2011||Not agreed||April 2013||2|
|China||No previous visits||Feb/March 2013||October 2013||2||$20,000 for both China and Singapore|
|Singapore||No previous visits||Not agreed||October 2013||2|
|US||September 2012||> 3 Years||Not agreed||May/June 2013||3||$36,000|
Source: ATO Draft MAP Strategy 2013.
4.46 The ATO has acknowledged stakeholder concerns with the limited travel over the last couple of years. It explains that CAR negotiations with a number of countries were originally scheduled to take place in June 2012. However, senior ATO management decided to postpone the travel until April 2013 and use alternative methods of progressing the relevant cases due to the early stage of the negotiations and that the ATO was still formulating its negotiation options.523 During this period, staff changed within one of the foreign revenue authorities and new relationships needed to be established.
4.47 During the finalisation of this review, the ATO has advised the IGT that it intended to review its APA program, including the patterns and numbers of APA applications, to improve its effectiveness and efficiency. Any amendments that may be required to Practice Statement PSLA 2011/1 will also be made.524
4.48 APAs are an important vehicle to resolve transfer pricing issues. For taxpayers, APAs may provide a more flexible and cheaper process to obtain certainty on the application of the transfer pricing law. For the ATO, APAs may provide a level of assurance that the arm's length principle is being appropriately applied and provide an invaluable source of intelligence on emerging business and industry practices.
4.49 However, a significant impediment for taxpayers to seek an APA is the lengthy timeframe that may be involved. As stated earlier, a substantial proportion of APA and MAP cases exceed the ATO's expected timeframes. The ATO's APA program update also indicates a general trend of increasing average timeframes for APAs. For example, there was a substantial increase in duration of bilateral APAs in 2009 averaging 12 months, to averaging 25 months in 2010, with some improvement in 2011.525 At the time of this review, the ATO's APA program update was not available for the 2011-12 and 2012-13 years.
4.50 By comparison, the ATO's average bilateral APA timeframes are faster than those of the IRS which averages 44 months.526 However, as stated earlier, some observers have ranked both the IRS and ATO poorly in terms of their performance in APA management including timeframes. The ATO's timeframes used to be similar to those of the United Kingdom's (UK) Her Majesty's Revenue and Customs (HMRC) but HMRC has significantly improved its average bilateral timeframes in 2011-12 to 16.9 months.527
4.51 A number of reasons contribute to extended timeframes , including:
- the type of APA and complexity of issues requiring further information;
- the capability of the ATO's APA teams to quickly refine and resolve issues;
- taxpayers' responsiveness to the ATO's engagement; and
- the high case load and lack of resources available within the Competent Authority area of the ATO.
4.52 In relation to bilateral APAs and MAPs, a proportion of elapsed timeframes is attributable to the engagement between the ATO and overseas revenue authorities. Improving case planning and streamlining processes between the authorities may assist in improving timeframes. In this respect, the IGT notes that the US is also considering streamlined MAPs with its trading partners.528
4.53 Further, a number of studies have been undertaken into improving such bilateral processes, including the use of international tax arbitration for 'aged' MAPs.529 However, as arbitration of international tax disputes is not an established practice, various complications may arise. Therefore, including third parties in such bilateral approaches may be better approached in an incremental fashion to engender broader support.530 In this respect, the ATO could explore the options for early neutral evaluation, in appropriate circumstances, as it can provide a more flexible process than arbitration without the requirement to commit any party to a binding determination.
4.54 In addition to external factors, such as bilateral negotiations, the data on the ATO's internal cycle times for APAs indicate extended timeframes are encountered in all stages of APAs in a substantial number of cases. This data strongly indicates a need for more robust project management of APA cases, particularly; as it appears that the pre-lodgment phase of APAs is not consistently reported. Indeed, ATO IQF reports have raised concerns with the prevalence of ATO activities occurring before commencement of the matters in Siebel.
4.55 In this respect, PWC Legal had previously conducted a detailed review of the ATO's APA program and made specific recommendations in relation to improving project management, as amongst others, which are reproduced in Appendix 3.531 The ATO agreed with most of the aims of the recommendations, however, it did not agree with all of the recommended actions. Given that extended timeframes for APAs continue to be experienced, the IGT is of the view that the ATO should reconsider the project management issues identified by PWC Legal's review and its responses to the recommended actions, including:
- promoting and using the APA program;
- providing clarity on the types of APAs that will be accepted into the program;
- ensuring that taxpayers are made aware, at the outset of APA processes, that they may initiate independent internal review processes; and
- establishing clear criteria where the ATO will withdraw from APA negotiations.
4.56 The IGT is of the view that project management of APAs could be improved, compliance burden on taxpayers reduced and lengthy disputes avoided if the ATO adopted a 'stage and gate' approach to reach a common understanding of the facts and evidence and to ensure each party appreciates the view of the other. As stated in previous IGT reviews, such an approach should not preclude the ATO from revisiting its views where, through no fault of its own, material facts come to light after, for example, agreement has been reached on the facts.
4.57 Additionally, allocated resourcing for expected caseloads is needed. Rejecting APA applications on resourcing grounds should be avoided as it would be contrary to the objective of the APA program to promote a more effective and efficient means to resolve transfer pricing issues. Reducing caseloads by providing alternative means for taxpayer certainty, such as providing safe harbours, would achieve that objective.
4.58 Although the ATO generally has little notice of APA applications, it is possible for the ATO to estimate the number of bilateral APA applications directly and indirectly generated by its compliance activities, as is done in the SME business line to estimate the number of objections. The IGT considers that an estimation of potential bilateral APAs and MAPs may provide the ATO with an indication of the funding required to allow their efficient negotiation.
4.59 However, a smaller proportion of cases which cannot be predicted will remain. This nature of APA applications indicates a need for a source of variable funding, such as an application fee. Whilst the 2008 APA Review found that stakeholders appreciated that there was no fee,532 in this review stakeholders preferred a fee where it assists the efficient resolution of bilateral APAs. It has also been suggested that implementing such a fee may be difficult for the ATO as it would need to appropriately manage taxpayers' expectations of timely progress towards favourable results, which may be outside of the ATO's control. However, the IGT considers that such fees, if judiciously spent and couched in appropriate terms that do not set inappropriate taxpayer expectations of the ATO, may be an effective remedy.
4.60 The ATO's efficient and effective handling of bilateral APAs and MAPs depends upon, amongst other things, the ATO's capability. The need for specialists in bilateral APAs and MAPs is greater than transfer pricing compliance activities as the former require independent negotiation with corresponding overseas competent authorities, amongst other things. The ATO has recently moved to develop the capability of operational staff by providing a greater role for them in bilateral APA and MAP work. From a development perspective this is understandable. However, there is a real risk that such a move will compromise the independence of the negotiation function where there is insufficient resourcing for CARs to provide sufficient supervision and test the evidence on which operational case teams rely. Such a position is implicit in the OECD's guidance:
In order to enhance the independence of a subsequent review of a case by a Competent Authority, it is recommended that Competent Authorities maintain a level of autonomy from the audit function of a tax administration...
The guiding principle should be that the Competent Authority's function is to ensure a fair and appropriate application of the convention, not to seek to uphold all adjustments proposed by the tax authorities of its country.
Independent and sufficient funding will also enhance the Competent Authorities' autonomy and enable it to carry out its mandate without becoming overly reliant upon other areas of a tax administration which do not share the Competent Authorities' primary objective, namely relieving double taxation. Tax administrations should ensure that the Competent Authority function is given sufficient resources, including qualified personnel, funding, training, and other program needs, to be able to carry out MAP responsibilities in a timely, effective, and efficient manner.533
4.61 Transfer pricing disputes involve large amounts of information from which inferences are drawn to evidence economic outcomes, such as prices and profit. This takes significant periods of time to properly consider and develop cogent positions. If CARs were to be inadequately resourced to perform this function, they may not be able to effectively determine strengths and weaknesses of overseas counterparts' positions as they would be forced to rely on operational staff's evidentiary material, without objective review. The IGT considers it likely that the effectiveness and efficiency of CAR negotiations is likely to decrease substantially as a result.534 As Australia is heavily trade exposed, these negotiations involve significant reductions of other revenue authorities' adjustments. An inability to test operational case teams' evidence may risk revenue and reputation.
4.62 The CAR role is not a discretionary function and is required under Australia's tax treaties. Given the increasing workload and complexity at this level, the IGT considers that it is inadequate to only have three CARs. There is also potential for that number to decrease if the current position holders retire or leave the ATO.
4.63 Further, it appears that reduced funding and restructuring within the ATO has contributed to an increase in the time taken to conclude bilateral APAs and MAPs. These delays appear to be compounded where overseas CARs are replaced with new staff that will need to get across the work done by their predecessors before moving forward with negotiations — essentially starting the case again.
4.64 The IGT considers that the ATO's draft MAP strategy is a step in the right direction in an attempt to schedule face-to-face meetings with Australia's primary trading partners. The strategy currently outlines the best way for the ATO to manage bilateral APAs and MAPs which is to accumulate those cases and prioritise trading partner jurisdictions in terms of travel.
4.65 An important aspect promoting overall transparency of the APA program is the publication of a report, the APA Program Update, which provides information indicating the ATO's performance. The ATO advises that this report has not been published since 2011 due to lack of sufficient resources. Publication of such data promotes increased accountability and management responsiveness to issues as they emerge.
The IGT recommends that the ATO:
- promote and use the APA program;
- identify the types of arrangements that will be accepted into the APA program;
- set out the criteria that would lead the ATO to withdraw from APA negotiations;
- require ATO officers, at the outset of APA negotiations, to make taxpayers aware of the ATO's independent internal review process and the circumstances in which it can be initiated by the taxpayer;
- implement a 'stage and gate' process in relation to APAs, such that closed stages may only be reopened where material new information becomes available to the ATO;
- explore options for reducing the timeframes for bilateral negotiations, such as mutual case planning, streamlined processes and early neutral evaluations, in appropriate circumstances;
- estimate the number of bilateral APA applications by examining the causes of the applications, including the extent to which previous applications were directly or indirectly generated by compliance activities;
- consider an appropriate administration fee for complex bilateral APAs;
- better resource the Competent Authority function and draw in expertise to enable it to appropriately test the evidence supporting position of operational case teams with respect to bilateral APAs and MAPs; and
- re-introduce the public reporting of the information on its APA program and implement similar reporting for MAPs.
Agree in part
The ATO agrees with parts 1 to 4, 6, 7 and 10.
The ATO disagrees with part 5. An APA should be subject to a project plan and that project plan should include clearly defined stages. However, the plan must allow for flexibility as factual analysis, issue identification, and application of law and policy are not linear processes that can be subject to a "closed gate" or to a limitation placed on reopening a stage based on material new information becoming available.
The ATO disagrees with part 8 and does not consider it appropriate to charge an administrative fee for any APA applications. Any such charge may also require legislative or policy change and would therefore also be subject to the views of Government.
The ATO also disagrees with part 9 and believes there are sufficient competent authority resources available, having regard to: process improvements; the number and complexity of MAP matters; and the fact the majority of the work is undertaken by compliance teams. In the context of the relatively small number of cases, to the extent there is a need to build capacity, we consider the focus of that activity is more likely to be on better developing the capability for MAP cases in our audit teams and we will be addressing this through the implementation of the new profit shifting strategy.
4.66 There are APA cases in which the level of complexity and risk are so high that the community would expect the ATO to critically assess the facts supporting the taxpayers' arrangements. The ATO's staff instructions envisage 'original work' to be conducted in these instances. However, if the ATO were to require taxpayers to provide a similar level of evidence to that expected in an audit, there is risk that the APA program would not attract the more complex APAs, particularly given the 'voluntary nature' of APAs as noted in PWC Legal's 2008 APA Review.535
4.67 Further, if such a resource intensive approach were to continue, a significant reduction in the effectiveness of the APA program may ensue as the ATO may be using some of its scarce resources on arrangements of lesser risk when they may be better utilised on more complex arrangements. Indeed, the 2008 APA review identified that the APA Program 'struggles with... new, complex transfer pricing issues and in some cases, the process appears to break down for taxpayers and the ATO'.536
4.68 A similar issue of balancing information needs with compliance costs arises in relation to private rulings. This issue has been raised in the private ruling context in the IGT's Review into Improving the Self Assessment System.537 If assumptions materially differ to the actual facts, they effectively invalidate the protection of the ruling or the APA. In relation to APAs, Practice Statement PSLA 2011/1 provides for the use of 'critical assumptions'. However, their use appears to be limited to the occurrence of material future events.
4.69 The IGT is of the view that the ATO could reduce overall administrative and compliance costs by allowing ATO officers to make critical assumptions of facts in a broader range of circumstances, than stipulated in Practice Statement PSLA 2011/1, where taxpayers provide written assurances that the relevant facts are correct. Such taxpayer assurances would, however, need to acknowledge that the APA may be vitiated, in whole or in part, in any subsequent ATO compliance activities where such assumptions are material and cannot be supported by evidence.
4.70 It should be noted, however, that there may be some situations where the ATO's concerns may only be allayed through intensive information gathering, such as concerns with the characterisation of the tested entity or 'commercial reality' of arrangements. Additionally, there are cases which cause ATO officers such concern that they may be considering withdrawing from the APA process or commencing an audit. In this respect, the ATO's staff instructions do not clearly set out what is expected to be communicated to taxpayers in these circumstances.
4.71 The IGT considers that the ATO's engagement with taxpayers on issues of concern is critical to maintaining taxpayer and broader perceptions of the APA program's utility. Providing clearer directions to ATO staff on what and how such concerns should be communicated to taxpayers in these circumstances would provide greater transparency on the reasons for 'audit-like' approaches in APA processes. Additionally, a cooperative approach entails reasonable opportunity for taxpayers to address those concerns if they arise.
4.72 In the IGT's view, in such circumstances, ATO officers should be required to communicate to taxpayers any concerns with their arrangements and related tax effects in APA applications and provide reasonable opportunity to address those concerns. These communications should clearly describe the concerns, the information required to address them and the consequences if those concerns persist. The IGT notes that the 2008 APA Review made similar recommendations.538
The IGT recommends that the ATO amend PSLA 2011/1 to:
- allow ATO officers to make critical assumptions of facts in APAs in a broader range of circumstances where taxpayers provide written assurances that the relevant facts are correct and that they bear the risk arising from any material inaccuracies; and
- require ATO officers communicate to taxpayers any concerns with their arrangements and related tax effects in APA applications and provide reasonable opportunity to address those concerns. These communications should describe the concerns, what information would allay those concerns and what the consequences will be if those concerns are not allayed.
The ATO will consider these as part of the broader review of the APA program and PS LA 2011/1.
494 Michael Walpole and Nadine Riedel, The Role of Tax in Choice of Location of Intellectual Property: Report for the Oxford University Centre for Business Taxation (2011).
495 ATO, 'PS LA 2011/1', above n 148, para .
496 ibid para .
497 ibid para .
498 ATO, National Tax Liaison Group (NTLG) Transfer Pricing Sub-Group Minutes (March 2011); ATO, National Tax Liaison Group (NTLG) Transfer Pricing Sub-Group Minutes (14 November 2012) p 5.
499 ATO, 'PS LA 2011/1', above n 148, paras [17(b)(viii)], .
500 ibid paras , .
501 ibid para .
502 ATO, 'NTLG Transfer Pricing (March 2011)', above n 497; ATO, 'NTLG Transfer Pricing (14 November 2012)', above n 497, p 5.
503 As identified earlier in the IQF reports, the quality of Siebel data varies.
504 As identified earlier in the IQF reports, the quality of Siebel data varies.
505 ATO, Communication (7 May 2013).
506 ATO, Communication 1 (13 March 2013).
507 ATO, 'IGT Review of Transfer Pricing - Management of the APA Program' (February 2013) Internal ATO Document.
509 ATO, 'Response to PwC Legal Report', above n 108; ATO, 'Communication 1 (13 March 2013)', above n 105.
510 ATO, 'Response to PwC Legal Report', above n 108.
511 ATO, 'Communication (22 March 2013)', above n 166; ATO, Income Tax: International Transfer Pricing - Transfer Pricing and Profit Reallocation Adjustments, Relief From Double Taxation and the Mutual Agreement Procedure, TR 2000/16A, 24 July 2002, para [4.53].
512 ATO, 'Level 4 Report', above n 353.
514 ATO, 'Office Minute: International MAP (Competent Authority) Strategy' (16 April 2013) Internal ATO Document, p 5.
515 ATO, 'Management of the APA Program', above n 506; ATO, 'MAP Strategy', above n 513.
516 Centre for Tax Policy and Administration, OECD, 'MEMAP', above n 46, para [1.3.1].
517 ATO, 'Communication (22 March 2013)', above n 166.
519 ibid; ATO, 'MAP Strategy', above n 513; ATO, 'Internationals Health of the System Assessment (HOTSA) 2012 (undated) Internal ATO Document.
520 ATO, 'NTLG Transfer Pricing (March 2011)', above n 497; ATO, 'NTLG Transfer Pricing (14 November 2012)', above n 497, p 5.
521 ATO, 'Management of the APA Program', above n 506.
522 ATO, 'MAP Strategy', above n 513.
523 ATO, Communication (15 April 2013); ATO, 'Communication 2 (17 April 2013)', above n 104; ATO, 'Communication (22 March 2013)', above n 166; ATO, Communication (25 November 2013).
524 ATO, 'Communication (31 October 2013)', above n 139.
525 The last APA Program report was 2010-11; ATO, 'Communication (19 March 2013)', above n 265.
526 IRS, Announcement and Report Concerning Advance Pricing Agreements (27 March 2009); IRS, Announcement and Report Concerning Advance Pricing Agreements (29 March 2010); IRS, Announcement and Report Concerning Advance Pricing Agreements (29 March 2011).
528 ATO, 'Communication (22 March 2013)', above n 166.
529 For example: Chloe Burnett, 'International Tax Arbitration' (2007) 36 Australian Tax Review 173, p 173.
530 Burnett, above n 528, p 173.
531 PWC Legal, above n 109, p 3.
532 ibid p 2.
533 Centre for Tax Policy and Administration, OECD, 'MEMAP', above n 46, p 41.
534 ATO, 'Communication (12 March 2013)', above n 104; ATO, 'Tier 2 Project Status Report: Transfer Pricing -Strategic Compliance Initiative' (12 March 2013) Internal ATO Document.
535 PWC Legal, above n 109, p 3.
536 ibid p 2.
537 IGT, 'Self Assessment Review', above n 388.
538 PWC Legal, above n 109, p 30. Page 168