APAs in the Spotlight

Advance pricing arrangements (APAs) play an important role in preventing international tax disputes before they arise, reducing the need for taxpayers to rely on the mutual agreement procedure (MAP) mechanism to resolve significant tax disputes. This article provides a brief summary of the OECD’s recent guidance on APAs and provides an update on Canada’s current APA program.

Bilateral and multilateral tax disputes are becoming increasingly common, and the OECD has noted that many jurisdictions face challenges in keeping up with the many new cases added each year. In accordance with BEPS action 14, the OECD is making significant efforts to monitor, review, and implement minimum standards to improve dispute resolution processes among OECD jurisdictions. It recently released several reports that aim to improve the MAP and APA processes.

Recent OECD Publications on APAs

A full review of all efforts undertaken by the OECD to improve dispute resolution processes is beyond the scope of this article. However, several recently published reports are worth highlighting.

Bilateral and Multilateral APA Manuals

The OECD’s Forum on Tax Administration (FTA) recently developed (1) the Bilateral Advance Pricing Arrangement Manual and (2) the Manual on the Handling of Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements.

The Bilateral APA Manual, published in September 2022, provides guidance on streamlining the bilateral APA (BAPA) process. The FTA surveyed nearly two dozen countries and certain taxpayers with a view to understanding the practical aspects of how BAPA cases are handled. On the basis of these surveys, the FTA concluded that BAPAs are an effective tool for providing advance certainty but that certain obstacles impede their utilization. These obstacles include the following:

• BAPAs take a long time to complete,
• the differences among different jurisdictions’ BAPA processes increase the length of the BAPA process unnecessarily,
• BAPA processes require significant resources both from competent authorities and from taxpayers, and
• there is a lack of transparency among stakeholders and in key parts of the BAPA process.

To address these obstacles, the FTA identified 29 best practices that broadly relate to the following:

• mitigating, where possible, delays created by differences among the BAPA processes in different jurisdictions;
• avoiding information asymmetries between competent authorities by ensuring that these authorities have access to the same information, in the same form and at the same time;
• increasing transparency between competent authorities and taxpayers throughout the BAPA process; and
• ensuring that competent authorities and taxpayers have realistic expectations at each stage.

Interestingly, the FTA called out the important role of the taxpayer in ensuring an effective and efficient BAPA process. Competent authorities shared with the FTA that the BAPA process is more efficient and effective when both taxpayers and treaty partners take principled and reasonable positions from the outset. Competent authorities noted that a key difficulty in obtaining agreement arises when the positions initially adopted by the parties are not necessarily considered to be in line with arm’s-length principles and when opening positions are seen as bargaining positions.

In that regard, one of the best practices proposed by the FTA is that taxpayers should file their tax returns in the relevant jurisdictions for the proposed covered years on the basis of the positions taken in their BAPA application. The FTA expects that this would ensure that positions in the BAPA are both reasonable and defensible, with a realistic likelihood of being acceptable to both jurisdictions involved.

In February 2023, the FTA released the Manual on the Handling of Multilateral MAPs and APAs, which explores different approaches to handling multilateral disputes. As the manual notes, multilateral disputes involve several challenges beyond those encountered in bilateral disputes (both in the MAP and APA contexts). These added challenges include the following:

• a lack of consensus among jurisdictions regarding the situations in which multilateral solutions are appropriate;
• a lack of agreement among jurisdictions on the most appropriate legal basis for dealing with multilateral issues (for example, on whether multiple requests are required, and on whether treaty relationships need to exist between all jurisdictions involved);
• uncertainty regarding how filing periods and time limits under the various treaties and the domestic law affect multilateral disputes; and
• various procedural concerns, such as how to effectively conduct multilateral discussions and share information.

Perhaps disappointingly, the Manual on the Handling of Multilateral MAPs and APAs does not prescribe any particular methods for handling multilateral MAPs and APAs; instead, it is focused on providing general information and suggestions for tax administrators, with the understanding that the administrators tasked with handling such multilateral disputes have varying levels of experience.

Notably, neither the best practices identified in the Bilateral APA Manual nor the general suggestions in the Manual on the Handling of Multilateral MAPs and APAs are binding on member jurisdictions, and the FTA will not be reviewing or monitoring the progress of the implementation of the guidance.

Revised Peer Review Process

The OECD also recently released a revised assessment methodology for the peer review process related to BEPS action 14. BEPS action 14 created minimum standards in order to make dispute resolution processes more effective and efficient, and the peer review process (established in 2016) created a mechanism that enables jurisdictions to evaluate their peers in the implementation of those minimum standards.

The revised assessment methodology provides for a process of continual monitoring. The scope of the monitoring under the revised process is based on whether the particular jurisdiction is considered to have a “meaningful MAP experience.” A jurisdiction has a “meaningful MAP experience,” as defined, if it either has 10 MAP cases, on average, in its year-end inventory over the three previous years or receives feedback from member countries that its policy or practice concerning MAP cases requires improvement. Member jurisdictions will be subject to monitoring as follows:

• A full peer review process will be undertaken for jurisdictions (one of which is Canada) that are considered to have a meaningful MAP experience. This process will begin in January 2024, and each qualifying jurisdiction will be reviewed once every four years. The assessment schedule for the full peer review process will be released by the end of 2023.
• A simplified peer review process will be undertaken for jurisdictions that do not have a meaningful MAP experience, with the aim of helping them set up a more robust MAP program for future MAP cases. This process started in January 2023.

APA Reporting Framework

The final item of note is the new APA reporting framework, released in January 2023, which will require all OECD Inclusive Framework jurisdictions to start reporting annual statistics on APAs from 2024 onward. These statistics will provide a more complete and accurate picture of a jurisdiction’s efforts with respect to dispute prevention and resolution and is expected to increase transparency. The new framework will require, among other things, jurisdictions to report the following on an annual basis:

• the number of APAs in inventory at the start of the reporting period,
• the number of APA applications filed during the reporting period,
• the number of APAs granted during the reporting period,
• the number of APA applications rejected during the reporting period,
• the number of APAs in inventory at the end of the reporting period, and
• the average time taken to grant APAs during the reporting period.

The APA reporting framework is similar in many respects to the MAP statistics that have been reported on for several years as part of BEPS action 14. The annual MAP statistics provide interesting data points, and it is hoped that the APA reporting will lead to the same transparency among the jurisdictions of the OECD Inclusive Framework.

Canada’s APA Program

Canada already has a robust reporting system for its APA program, and the CRA publishes an annual report that includes most of the information that will be required under the OECD’s reporting framework.

In the Advance Pricing Arrangement Program Report 2021, released in January 2023, the CRA reported 30 pre-filing meetings, 6 new accepted cases, and 9 completed cases (8 bilateral and 1 unilateral), with a closing inventory of 66 active APA cases in progress. There were 41 applications under consideration for acceptance to the program as of December 31, 2021.

In 2021, the average time required to complete a bilateral APA, from the time of acceptance to the time of completion, was 49.4 months. For the 8 bilateral APAs that were completed in 2021, it took an average of 25 months to complete the due diligence phase, an average of 16 months to negotiate with the corresponding tax authority, and an average of 8 months to draft and finalize the agreement. The total average time of 49.4 months in 2021 is a pronounced increase from the 36.9-month average in 2020, but it is roughly in line with the historical average, as shown below:

The CRA’s 2021 report also noted a consistent trend in the completed APAs: most have been bilateral or multilateral. On the basis of this trend, the CRA has concluded that applicants and the CRA continue to be focused on bilateral or multilateral arrangements to eliminate double taxation and secure the highest degree of tax certainty. This is consistent with the OECD’s findings in its two manuals (the Bilateral APA Manual and the Manual on the Handling of Multilateral MAPs and APAs), as described above.

Conclusion

The OECD’s recent reports indicate that many jurisdictions continue to have limited experience in coordinating bilateral and multilateral MAP and APA cases. The time and effort required to achieve a BAPA or a multilateral APA remain a large impediment to countries’ efforts to achieve more streamlined dispute prevention and resolution processes. It is hoped that documents such as the OECD manuals are important steps toward the achievement of more effective and efficient processes in the future.

Kevin Chan and John J. Tobin
Torys LLP, Toronto