On 28 September 2022, the OECD released the Bilateral Advance Pricing Arrangement (“BAPA”) Manual. The handbook proposes best practices for jurisdictions to streamline, expedite and improve BAPA processes based on member surveys. In particular, the BAPA Handbook encourages jurisdictions to conclude BAPAs within 30 months and work to further reduce completion times to 24 months or less.
APAs provide taxpayers and tax administrations with advance certainty for transfer pricing of certain covered transactions during covered periods. In recent years, some OECD members, such as the United States, have introduced new preventive dispute prevention mechanisms, such as the International Compliance Assurance Program (“ICAP”). But APAs are still the model advance dispute prevention tool and the only one that provides legal certainty for taxpayers on transfer pricing matters.
The handbook provides 29 best practices that jurisdictions must follow in order to have successful APA programs. It also includes a sample timeline outlining completion times for milestones for BAPA cases to be concluded within 30 months, with an additional goal of reducing completion times to 24 months. For taxpayers, this is a well-received and ambitious goal that should significantly reduce the time to complete the APA. By way of comparison, the average time to completion for BAPAs concluded by the IRS in 2021 was over 35 months (and over 45 months for “new”, i.e. non-renewal BAPAs), as discussed in a previous post on pricing. Advances of 2021 Reciprocal Agreement (“APMA”) APA Annual Report.
Some of the other significant best practices proposed, many of which are already generally observed by most competent authorities, include:
- The duration of a BAPA should generally be at least five years, including at least two future tax years, in which the facts and circumstances are expected to be the same.
- During any engagement between a competent authority and the taxpayer, before a taxpayer is accepted into a BAPA process or submits a BAPA application, whichever is later, the competent authorities should not:
- improperly influence the taxpayer’s position on any matter forming part of its BAPA application;
- undertake an analysis for the purpose of determining the position of the competent authority on any issue associated with the BAPA. Any preliminary review undertaken by a competent authority as part of an advance-engagement or pre-filing should only be to inform the taxpayer of matters that should be addressed in its application for acceptance in a BAPA process (including collateral issues ); OR
- engage with the taxpayer to unilaterally agree on any position for the taxpayer’s BAPA enforcement (including acceptable transfer pricing method, comparables or prices).
- Competent authorities and BAPA officials should not grant taxpayers access to position papers, and taxpayers should not participate in substantive discussions about the BAPA between competent authorities.
- During the BAPA process, taxpayers must file income tax returns in the relevant jurisdictions in the proposed covered years based on the positions filled in their BAPA application.
- Jurisdictions should ensure they have adequate policies/practices in place for their audit and BAPA functions to communicate and coordinate effectively. In this regard, jurisdictions should also include an explanation of the relationship between the audit and the BAPA process in their published BAPA guidance.
- Subject to national limitations, a competent authority involved in the BAPA process should also ensure that it informs the treaty partner of potential audit interactions, such as ongoing or planned audits in relation to one or more transactions covered by the BAPA or the anticipated presence of auditors in BAPA discussions (including BAPA team auditors).
Overall, the APMA and its relevant partner authorities have successfully maintained robust APA programs during the pandemic, as demonstrated by the near-record number of APAs recently received and concluded. The handbook appears to be another step in the right direction to ensure more taxpayers have access to this valuable tool.
