Updated HMRC Advance Pricing Agreements guidance

HMRC have updated their guidance on Advance Pricing Agreements (APAs) set out in SP02/10 (and published in HMRC's International Manual at INTM422010 et seq. The new guidance adds to and expands the guidance in a number of respects, both as regards the formal process and HMRC's expected timelines.

Of particular note is the new guidance on the impact of open investigations and enquiries, which will now generally inhibit the ability of a taxpayer to make an APA request until those enquiries are concluded. This will also include situations where HMRC has suggested to the taxpayer that it should engage in the Profit Diversion Compliance Facility.  

Background

An APA is a written agreement between a business and HMRC which determines a method for resolving transfer pricing (TP) issues and provides assurance to the business that the TP treatment of transactions will be accepted by HMRC for the period covered by the APA.

SP02/10 sets out general guidance on how HMRC interprets the APA legislation (in TIOPA 2010 ss.218 to 230) and operates the UK APA programme.

The new guidance updates SP02/10 taking into account both international and domestic developments since SP02/10 was first published in 2010. These include the publication by the OECD of best practices on APAs.

The most significant update - Impact of enquiries

The new guidance specifically states that where HMRC has commenced an enquiry into the relevant transactions or related transactions, those enquiries will need to be completed before HMRC will consider an APA request. This will be the case whether the APA is for future years or whether it is with roll back to earlier periods. Once an enquiry is complete, an APA request can be made, though businesses may also need to consider whether they should make a treaty mutual assistance procedure (MAP) request to protect time limits in case an APA is not agreed.

This is a significant change from HMRC's previous guidance, which provided more flexibility in terms of how an APA could interact with an ongoing enquiry. Specifically, in the previous guidance, HMRC had stated that the transfer pricing methodology agreed through an APA may be relevant to the resolution of any transfer pricing enquiries raised for earlier periods, if the particular facts and circumstances surrounding those years are substantially the same, and even indicated that coordinating the APA request in respect of future years with any transfer pricing enquiry in respect of prior years could improve overall efficiency and reduce duplication of enquiries.

It is also important to note that the new guidance also applies where HMRC has written to a taxpayer asking them to consider registering for the Profit Diversion Compliance Facility (PDCF) before a formal interest in an APA has been expressed. HMRC would expect a taxpayer to conclude actions under the PDCF for historic periods before HMRC will consider an APA. Given the open nature of the "nudge letters" used by HMRC in this context, this may prove a significant limitation for affected businesses.

As regards overseas enquiries, HMRC indicate that any possible APA process would be fact dependent. HMRC's willingness to consider an APA would depend on all the facts and circumstances, including whether the overseas tax administration would engage on the APA in those circumstances.

Other updates

Other updates mainly related to matters which are already adhered to in practice, or in relation to the APA process and timings which generally aligned with the latest OECD publication on best practices on APAs.

• Bilateral vs unilateral arrangements - In line with current practice, the guidance states that HMRC expects APA applications will be bilateral rather than unilateral except in cases where the other party is resident in a non-treaty partner jurisdiction, where the other treaty partner has no APA process, or where there is little extra to be gained by seeking a bilateral agreement. In the new guidance, it has expanded the criteria for exception to include cases where the business have approached that other treaty partner to engage on a bilateral basis and that treaty partner has declined.

• Expression of Interest (EOI) process - The guidance has changed from "strongly recommending" to "requiring" taxpayers to engage in an EOI process, but generally, the guidance is consistent with current practice. The new guidance expands on what the EOI should cover, such as brief details of any APA or MAP requests, APA agreements or other rulings in the UK or overseas, relating to the affected transactions or substantially similar transactions, including requests made to third states, made by either of the parties to the proposed APA. Of particular interest is that in addition, HMRC expect the EOI to include details of any current enquiries which may impact on the affected transactions, in the UK or overseas, including but not limited to TP enquires.

• Timing of application and confirmation of admissibility **- Where a formal application is then made within six months of when HMRC indicates that it is willing to consider the APA proposal, HMRC will confirm the admissibility of the APA within 30 days of receipt of the application, which we expect is a "formal" confirmation (in practice, we would expect HMRC would provide indication at the EOI meeting as it has been doing until now). HMRC will then seek to agree a timeline to ensure the APA progresses, tailored to the facts of the particular case and dependent on agreement with the other tax authority. Where possible, HMRC will work with the other tax authority to agree joint information requests to prevent duplication of work for the taxpayer.

• Timing of reaching agreement - HMRC has provided specific timing targets for completing the APA process. This includes:

  • An overall target timeframe of 30 months to reach agreement (whilst noting that a bilateral APA can take 36 months or longer). Once cases go beyond this target, senior members of the team will review the case with a view to progressing it. In the case of a bilateral agreement, agreement is first reached with the other tax administration and then the UK business is asked they agree with the terms. If the business does not agree, then the process will normally be terminated, except in exceptional circumstances.
  • Where there is a suspension or similar pause to progress on an APA for at least six months, HMRC may request that a new application is made, dependent on the facts and circumstances (for example, if there are any major changes to the proposed affected transactions or the business). HMRC will keep the business appraised of the negotiation process, but lack of response or engagement of the other tax authority may lead to HMRC terminating the process.
  • Domestic agreement between HMRC and the taxpayer to be signed within 60 days of the competent authority mutual agreement being notified to the taxpayer and, accordingly, businesses are encouraged to begin drafting the domestic agreement at an early stage when the case is heading towards mutual agreement.

• TP policy during the negotiation period - In line with general practice, but HMRC has clarified its expectation that the taxpayer should complete tax computations based on the position put forward in the APA application, until such time that the APA is concluded and any variation to the proposed pricing is known.

• APA monitoring and review - The guidance now contains an expanded section on the taxpayer's requirement to deliver an annual report during the operation of the APA. The guidance includes details that HMRC would expect to see in the annual report, but such details are in line with current practice. What is new is that HMRC has also explicitly indicated that for APA years where the business has already filed returns, the business is required to lodge the annual report within 90 days from the date the domestic agreement is signed.

Comment

HMRC's most recent transfer pricing and Diverted Profits Tax (DPT) statistics for the period April 2021 to March 2022 (2021/2022) notes that in 2021/22 only 20 APAs were concluded by HMRC. This is down 50% compared with 2018/2019 and there has been a gradual reduction in new APAs since that year. In contrast, the average time to agree new APAs has increased substantially over the same period - from 33.6 months to 58.3 months. However, at the same time, the figures show that the number of new APA applications in 2021/22 has actually increased substantially. There were 40 new applications in 2021/2022 compared to only 24 in 2020/2021, for example.

It is certainly helpful that HMRC has updated its APA guidance, generally, to align it to the publication by the OECD of best practices on APAs. In particular, the introduction of guidance relating to expected process and timelines is somewhat helpful to alleviate growing frustration and concerns from taxpayers in respect of the long period that APAs generally take to conclude.

However, the update that it has made on the interaction with ongoing enquiries is likely to raise concerns for many businesses and it is an area that we would watch out for going forward in terms of practical application.