Part 1 - AL-Tax
Part 1 - AL-Tax Part 1 - AL-Tax
Chapter 6the tax base. If, for example, in a high-tax country expenses were deducted in thecourse of developing, say, a production site including patents and manufacturingprocesses, the MNC may have reason to shift such functions to a low-tax and/orlow-wage country at a time when, along the product life cycle, the product startsgenerating high profits. Such a shift is often realized after the investment hasbeen paid and deducted (depreciation) and the losses carried forward are wipedout. As a consequence of outbound business restructuring at the time of the productlife cycle, the tax jurisdiction loses twice: Firstly, through the shift of tax baseof future profits and, secondly, when it previously allowed the deduction ofexpenses (depreciation) to establish this tax base (and in many cases, thirdly,even through tax holidays granted for the investment).In general, the identification of an MNC’s relevant tax base and the allocationof this tax base into the jurisdiction in which the multinational operates is a keyproblem in corporate income taxation. Some steps to harmonize international orsupranational corporate income taxation have already been taken: The dense netof double tax treaties, the OECD Model Tax Convention, and the OECD TransferPricing Guidelines, or the initial attempts of the EU tax harmonization process.However, the general institutionalization process in international taxation is stillin its infancy and is characterized by a low level of harmonization regardingcross-country procedures. 76.2.3 The role of APAs in taxing multinationalsSeveral national tax authorities have established Advance Pricing Agreement (APA)programs (for an overview, see Brem, 2005). An APA is an arrangement that determines,ideally in advance of controlled related-party transactions, an appropriate setof criteria for the determination of transfer pricing for those transactions over a fixedperiod of time (Vögele and Brem, 2003a; Sawyer, 2004). The criteria shaping an APAare, for example, the transfer pricing method(s) used, the possible third-party comparablesand appropriate adjustments, and the so-called critical assumptions whichdefine economic indicators as a framework for using TPMs: Ranges of currency fluctuation,market development, economic crises, etc.6.2.3.1 The OECD perspective on APAsNormally, an APA is formally initiated by a taxpayer and requires negotiationsbetween the taxpayer, one or more related-party entities, and the tax administration(s)117
International Taxation Handbookof one or more nation states. APAs are intended to supplement the traditionaladministrative, judicial, and treaty mechanisms for resolving transfer pricing issues.They may be most useful when traditional mechanisms to allocate income ofrelated-party business within a multinational group fail or are difficult to applybecause of a lack of institutionalization and standardization in internationaltaxation aspects, such as transfer pricing and tax base allocation (OECD, 2001b,Paragraph 4.124).The OECD Transfer Pricing Guidelines describe an APA as having the followingcharacteristics (in reference to the mutual agreement procedures (MAP) of theOECD):‘[. . .] The objectives of an APA process are to facilitate principled, practical andcooperative negotiations, to resolve transfer pricing issues expeditiously andprospectively, to use the resources of the taxpayer and the tax administration moreefficiently, and to provide a measure of predictability for the taxpayer.[. . .] To be successful, the process should be administered in a nonadversarial,efficient and practical fashion, and requires the cooperation of all the participatingparties. It is intended to supplement, rather than replace, the traditional administrative,judicial, and treaty mechanisms for resolving transfer pricing issues.Consideration of an APA may be most appropriate when the methodology forapplying the arm’s length principle gives rise to significant questions of reliabilityand accuracy, or when the specific circumstances of the transfer pricing issues beingconsidered are unusually complex.[. . .] One of the key objectives of the MAP APA process is the elimination ofpotential double taxation.’(OECD, 2001b, A9–11)In contrast to the traditional form of tax assessment, which is often an adversarialmechanism imposed by a sovereign tax authority, an APA is a kind of cooperativearrangement between tax authorities (of at least one jurisdiction) and amultinational corporate taxpayer (Ring, 2000; OECD, 2001b, Paragraph 4.135). Inaddition to classical ex-post binding rulings, an APA serves to resolve, in a cooperativemanner before the business has taken place, the potential transfer pricingdisputes between these parties. As the OECD points out:‘APAs, including unilateral ones, differ in some ways from more traditional privaterulings that some tax administrations issue to taxpayers. An APA generally dealswith factual issues, whereas more traditional private rulings tend to be limited toaddressing questions of a legal nature based on facts presented by a taxpayer.The facts underlying a private ruling request may not be questioned by the tax118
- Page 87 and 88: International Taxation HandbookHays
- Page 89 and 90: International Taxation Handbookpape
- Page 91 and 92: International Taxation Handbookthat
- Page 93 and 94: International Taxation HandbookSwan
- Page 95 and 96: This page intentionally left blank
- Page 97 and 98: International Taxation Handbookequi
- Page 99 and 100: International Taxation Handbook4.2.
- Page 101 and 102: International Taxation HandbookTo c
- Page 103 and 104: International Taxation Handbookcase
- Page 105 and 106: International Taxation Handbookσ 1
- Page 107 and 108: International Taxation Handbook4.5
- Page 109 and 110: International Taxation HandbookThe
- Page 111 and 112: International Taxation HandbookHube
- Page 113 and 114: International Taxation HandbookTedi
- Page 115 and 116: International Taxation HandbookIt i
- Page 117 and 118: This page intentionally left blank
- Page 119 and 120: This page intentionally left blank
- Page 121 and 122: International Taxation Handbookregu
- Page 123 and 124: International Taxation Handbookterm
- Page 125 and 126: International Taxation Handbooktake
- Page 127 and 128: International Taxation Handbookat l
- Page 129 and 130: International Taxation Handbookothe
- Page 131 and 132: International Taxation HandbookCash
- Page 133 and 134: This page intentionally left blank
- Page 135 and 136: International Taxation HandbookThis
- Page 137: International Taxation Handbookas t
- Page 141 and 142: International Taxation Handbookbetw
- Page 143 and 144: International Taxation HandbookThe
- Page 145 and 146: International Taxation Handbook6.2.
- Page 147 and 148: International Taxation HandbookThey
- Page 149 and 150: International Taxation Handbookneut
- Page 151 and 152: International Taxation Handbookboun
- Page 153 and 154: International Taxation Handbookof t
- Page 155 and 156: Table 6.2Factors determining the ex
- Page 157 and 158: 136Table 6.2(Continued)Analytical F
- Page 159 and 160: International Taxation Handbook●
- Page 161 and 162: International Taxation Handbookthe
- Page 163 and 164: International Taxation HandbookNote
- Page 165 and 166: International Taxation HandbookErns
- Page 167 and 168: International Taxation HandbookWilk
- Page 169 and 170: This page intentionally left blank
- Page 171 and 172: International Taxation Handbooktest
- Page 173 and 174: International Taxation Handbookleng
- Page 175 and 176: International Taxation Handbook7.2
- Page 177 and 178: International Taxation Handbook7.3
- Page 179 and 180: International Taxation Handbooklike
- Page 181 and 182: International Taxation Handbook7.4.
- Page 183 and 184: International Taxation HandbookRisk
- Page 185 and 186: International Taxation HandbookDecr
- Page 187 and 188: International Taxation Handbooksuch
International <strong>Tax</strong>ation Handbookof one or more nation states. APAs are intended to supplement the traditionaladministrative, judicial, and treaty mechanisms for resolving transfer pricing issues.They may be most useful when traditional mechanisms to allocate income ofrelated-party business within a multinational group fail or are difficult to applybecause of a lack of institutionalization and standardization in internationaltaxation aspects, such as transfer pricing and tax base allocation (OECD, 2001b,Paragraph 4.124).The OECD Transfer Pricing Guidelines describe an APA as having the followingcharacteristics (in reference to the mutual agreement procedures (MAP) of theOECD):‘[. . .] The objectives of an APA process are to facilitate principled, practical andcooperative negotiations, to resolve transfer pricing issues expeditiously andprospectively, to use the resources of the taxpayer and the tax administration moreefficiently, and to provide a measure of predictability for the taxpayer.[. . .] To be successful, the process should be administered in a nonadversarial,efficient and practical fashion, and requires the cooperation of all the participatingparties. It is intended to supplement, rather than replace, the traditional administrative,judicial, and treaty mechanisms for resolving transfer pricing issues.Consideration of an APA may be most appropriate when the methodology forapplying the arm’s length principle gives rise to significant questions of reliabilityand accuracy, or when the specific circumstances of the transfer pricing issues beingconsidered are unusually complex.[. . .] One of the key objectives of the MAP APA process is the elimination ofpotential double taxation.’(OECD, 2001b, A9–11)In contrast to the traditional form of tax assessment, which is often an adversarialmechanism imposed by a sovereign tax authority, an APA is a kind of cooperativearrangement between tax authorities (of at least one jurisdiction) and amultinational corporate taxpayer (Ring, 2000; OECD, 2001b, Paragraph 4.135). Inaddition to classical ex-post binding rulings, an APA serves to resolve, in a cooperativemanner before the business has taken place, the potential transfer pricingdisputes between these parties. As the OECD points out:‘APAs, including unilateral ones, differ in some ways from more traditional privaterulings that some tax administrations issue to taxpayers. An APA generally dealswith factual issues, whereas more traditional private rulings tend to be limited toaddressing questions of a legal nature based on facts presented by a taxpayer.The facts underlying a private ruling request may not be questioned by the tax118