This article was first published in the November/December edition of Accounting and Business magazine.

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What is an APA?

An APA is a legally binding agreement between a tax authority and a business that will determine its intra-group pricing before a tax return is made. It can be made between a business and just one tax authority, known as a unilateral agreement, but there can also be bilateral or multilateral agreements which include an agreement between the two or more tax authorities involved at both ends of the intra-group transaction(s).

In the UK, HM Revenue & Customs has had an APA programme for over 20 years, with a dedicated team made up of experienced transfer pricing professionals. Business generally has a positive view of the UK’s programme, which is regarded as pragmatic and commercial in its approach.

Why might I want an APA?

In recent years, business has shown an increasing interest in APAs. This is true globally and in the UK, where applications to HMRC are understood to have increased 40% in the last year.

The obvious benefit from the agreement is achieving certainty around the transfer pricing arrangements. This can completely eliminate the risk of future tax audits, resulting tax adjustments and likely double taxation. It can also remove the need to make accounting provisions to cover disclosure requirements such as FIN 48 and Uncertain Tax Positions.

Businesses are increasingly using APAs more strategically. For instance, an agreement with HMRC can be extremely helpful to businesses facing transfer pricing challenges in other countries, by showing that the transfer pricing was considered reasonable in the UK.

Where a business is undergoing a major reorganisation, it can be beneficial to be able to quantify any tax benefits or reduce tax provisioning through certainty of the transfer prices. An increasing number of businesses are therefore applying for APAs when implementing major restructurings.

Most APAs run for five years. While some businesses may feel that this is a long time to be tied down, APAs are surprisingly flexible and very few actually fail to last their full term. In addition, it is often a relatively straightforward process to renew an APA after its first five years.

There is also the possibility to ‘roll-back’ the terms of an APA to earlier periods for which a tax return has already been submitted. This can help business to resolve tax disputes for earlier years.

Recent changes

HMRC’s procedures in relation to APAs are set out in its statement of practice, which was updated in December 2010 (set out in SP2/10). This sets out guidance for taxpayers on how HMRC interprets the legislation, allowing for APAs as well as practical considerations on applying for an APA. The updated guidance also heralds some important changes in HMRC’s approach.

Historically, there was a ‘complexity’ threshold for entry to the APA programme. In recognition of the limited resources available to HMRC, the APA team only accepted more complex cases into the programme (although no definition of complex was ever established). Under the updated guidance, this is no longer the case. HMRC is now more open to considering APAs that cover relatively straightforward intra-group transactions when these give rise to uncertainty.

Furthermore, HMRC was unlikely to support unilateral APAs in the past. This was because it saw the main aim of an APA as reducing the risk of double taxation, hence its preference for bilateral agreements.

The new guidance, however, highlights an increased willingness on the part of HMRC to consider and agree unilateral APAs, particularly where there is no formal APA programme on the other side of the transaction or where the extra effort required to negotiate a bilateral agreement is of little real value to the business.

How do I get one?

The generally understood process to achieving agreement with HMRC is set out in SP2/10. A typical bilateral APA process is expected to last 18 to 21 months, with unilateral APAs taking a considerably shorter time. HMRC will often also tailor the process to suit the needs of the particular applicant.

The first step is the ‘expression of interest’. This typically takes the form of a meeting and presentation to HMRC’s APA team. It is used by the business to present the high-level facts and circumstances of the transaction(s) that would be subject to the APA.

For HMRC, the meeting is an important first step to understand the reason for the APA request and provides background to the business and proposed pricing methodologies. The ‘expression of interest’ can also be undertaken on a ‘no-names’ basis through advisers, should the business not yet have finally decided to apply for an APA or if confidentiality is an issue.

The second step is the formal submission of the APA application. This takes the form of a written submission that provides background to the business, the industry and the pricing proposal (including the economic analysis that supports the arm’s-length nature of the pricing proposal).

The submission will also include ‘critical assumptions’ about the basis on which the pricing proposal is made. These assumptions protect the business and HMRC should major changes in the business mean the agreed pricing is no longer sustainable. Often, in the case of a bilateral APA, HMRC is willing to accept the submission material prepared for the other tax authority so as to reduce the administrative cost.

The next step is HMRC’s evaluation of the APA submission. The context for the evaluation phase is markedly different from the typical tax audit, being characterised by openness and cooperation from both sides. It is also expected that information shared with one tax authority will be made available to the other in a bilateral APA process. Generally, HMRC will prepare a position paper, which it will exchange with the other tax authority and negotiate a compromise position with them.

The fourth and final step is the formal agreement of the APA. HMRC has helpfully set out a template agreement in SP2/10. In a bilateral APA, there is an agreement between HMRC and the other tax authority as well as two separate agreements between each tax authority and the taxpayer in its country.

Some practicalities

While there is no charge by HMRC in applying for an APA, it can be necessary to devote significant resources to preparing the necessary materials. Depending on the complexity of the transactions and the proposed pricing, HMRC can also request substantial supporting information. Often, however, a properly prepared transfer pricing report will contain the bulk of the information that is needed. Moreover, HMRC does show a willingness to take a light touch approach, where it is considered appropriate.

In order to demonstrate that it has complied with the terms of the APA, the business must also prepare an annual compliance report. This should, however, not be an onerous task and should in practice amount to little more than a simple demonstration that the agreed transfer pricing methods have been applied.


A flexible and pragmatic approach to APAs is increasingly winning converts. While an APA might at first sight appear to be an expensive process and not suitable for many businesses, the reality is different and more and more businesses are embarking on an APA in an age of ever greater uncertainty.

Diane Hay is special adviser attached to PwC UK’s transfer pricing network and is the former UK competent authority with responsibility for the APA and MAP programmes in the UK. Kevin Norton is a senior manager at PwC