Part 1 - AL-Tax

Chapter 6●transactions affiliated with a high level of intangibles are more likely tobe candidates for APA solutions than transactions with the involvementof routine functions and standard business processes (for example, contractmanufacturing). One reason could be the demand for ex-ante certaintyon the appropriate transfer pricing method and pricing principles in suchnonroutine transactions (for example, shift of intangibles).❍ The economic environment may provide stable and reliable businessconditions or unstable and unforeseeable thresholds which determine aparticular transfer pricing policy. As economic and institutional stabilityin the field of transfer pricing increases, we might hypothesize that transferpricing controversy may decrease and, hence, the binding ex-ante natureof the APA vehicle may become less favorable to the tax base allocationproblem. In stable economic environments, it might be preferable toresolve a particular controversy in a standardized tax world outside APAgovernance.❍ The governance provided by APA programs also determines the relativeattractiveness of APAs. Here, the type of application (for example,‘request’ vs. ‘application’) and the type of audit in a given country mayaffect the relative preference for an APA.Finally, the actors involved in drafting individual APAs and in designingAPA programs appear to have explanatory power regarding the existence ofAPAs:❍ The taxpayer’s preference for ex-ante mechanisms and information disclosurein the course of an APA process, as well as their experience, is likely todetermine whether an APA is considered the preferred solution to allocatethe tax base in a given transfer pricing situation.❍ The same theory applies for tax administration. Some tax administrations(for example, the US IRS) have dedicated resources for an APA programso the marginal administrative costs (processing, administering, and organization)for each new APA decrease. Other states initially have to investin start-up activities in order to reorganize resources of the country’s taxadministration (mainly human resources such as economists and transferpricing experts) in order to develop an APA process.❍ Likewise, tax consultants may or may not have experience with APAprocesses. Some tax consultants specialize in transfer pricing and APAs,while others may feel that an APA is challenging or even suspicious.❍ Finally, the OECD plays the role of rule setter in international taxation.Some countries construct their transfer pricing agreements on the basis of139