Reproduced with permission from Transfer Pricing International Journal, null, 11/16/2012. Copyright 姝 2012 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com
APAs: the Portuguese perspective Alexandre Andrade, PLEN, Lisbon
An advance pricing agreement increases the security of both taxpayers and tax authorities
his article is intended to offer a coherent and structured analysis of some of the major aspects of the Portuguese regime applied to advance pricing agreements (APAs), known in Portugal as Acordos Pre´vios sobre Prec¸os de Transfereˆncia (APPT).
Alexandre Andrade is Head of the Tax Department 11/12
The role of multinational enterprises in world trade has increased dramatically over the last 20 years. This in part reflects the increased integration of national economies and technological progress, particularly in the area of communications. The growth of multinational enterprises presents increasingly complex taxation issues for both tax administrations and the multinational enterprises themselves since separate country rules for the taxation of multinational enterprises cannot be viewed in isolation but must be addressed in a broad international context.1 When independent enterprises transact with each other, the conditions of their commercial and financial relations (e.g. the price of goods transferred or services provided and the conditions of the transfer or provision) ordinarily are determined by market forces. When associated enterprises transact with each other, their commercial and financial relations may not be directly affected by external market forces in the same way, although associated enterprises often seek to replicate the dynamics of market forces in their transactions with each other. The prices charged between associated enterprises for the transactions (goods, services or intangible property) must follow the arm’s length principle which requires that the prices for goods, services or intangible property exchanged by related parties should be the same as if the parties were independent, acting in the same or similar circumstances.2 Advance Pricing Agreements are agreements which seek to set down in advance the method or methods that can be used to determine the terms and conditions that are normally agreed, accepted or practised by arm’s length entities in commercial and financing transactions with related parties.
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APAs are intended to supplement the traditional administrative, judicial, and treaty mechanisms for resolving transfer pricing issues and one key issue in the concept of advance pricing agreements is how specific they can be in prescribing a taxpayer’s transfer pricing over a period of years.3 By concluding an APA, enterprises avoid subsequent adjustments and corrections to their taxable base, since tax authorities have previously accepted the method or methods to determine the enterprise’s tax base in related operations according to the arm’s length principle. APAs can provide an opportunity for both tax administrations and taxpayers to consult and co-operate in a non-adversarial spirit and environment. The opportunity to discuss complex tax issues in a less confrontational atmosphere than in a transfer pricing examination can stimulate a free flow of information among all parties involved for the purpose of coming to a legally correct and practicably workable result. The non-adversarial environment may also result in a more objective review of the submitted data and information than may occur in a more adversarial context (e.g. litigation). The close consultation and cooperation required between the tax administrations in an APA programme also leads to closer relations with treaty partners on transfer pricing issues. An APA may prevent costly and time-consuming examinations and litigation of major transfer pricing issues for taxpayers and tax administrations.4
II. The Portuguese transfer pricing regime The Portuguese Transfer Pricing Rules follows the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and are based on three domestic sources: a. Article 63. of the Portuguese Corporate Tax Code (Imposto sobre as pessoas colectivas, summarily known simply as IRC), which introduced the regime, describes essential concepts, indicates the specifics and applicable methods and defines the concept and examples of a related party; According to n. 1 and n. 2, both of Article 63. of the
IRC Code: (1) In transactions, including single operations or series of transactions in goods, services or rights, as well as in financial transactions made between a taxpayer and any other entity, whether or not subject to IRC, with which special relations exist, terms and conditions should be contracted, accepted and practised substantially identical to those that would normally be contracted, accepted and practised between independent parties in comparable transactions; (2) The taxpayer shall use, in determining the terms and conditions that would normally be contracted, accepted and practised between independent parties, the method or methods that can ensure the highest degree of comparability between the transactions or series of transactions they carry out and other substantially identical transactions in normal market situations or in the absence of special relations, taking into account, inter alia, the characteristics of property, rights or services, the market position, the economic and financial situation, the business strategy, and other characteristics relevant to the companies involved, the functions they performed, the assets used and the distribution of risk. b. Decree n. 1446-C/2001, December 21, which complements the information in Article 63. of the IRC on various topics, namely explanation of the acceptable transfer pricing methods, documentation requirements and income adjustments; and, c. Decree n. 620-A/2008, July 16 that regulates the Advance Pricing Agreements.
III. Advance price agreements The possibility of concluding Advance Pricing Agreements was introduced in Portugal through Decree n. 620-A/2008, July 16. This Decree regulates the process for entering into an APA and sets out the obligations which will fall to taxpayers and to tax authorities during the terms of these agreements. With its introduction, regulation and implementation, enterprises are allowed to communicate to the Portuguese Tax Authorities their interest in discussing, negotiating and concluding an APA. An advance pricing arrangement (or agreement) is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (per example, method, comparables and appropriate adjustments thereto, critical assumptions as to futures events) for the determination of the transfer pricing for those transactions over a fixed period of time. An APA is formally initiated by a taxpayer and requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax authorities.5 They seek to set down in advance the method or methods that can be used to determine the terms and conditions that are normally agreed, accepted or practised by arm’s length entities in commercial and financing transactions with related parties. Following the approval of the Decree n. 620-A/2008, July 16 in Portugal, Advance Price Agreements provide a useful mechanism for both taxpayers and tax authorities, given that they can establish a transfer pricing methodology for a number of years, providing greater certainty regarding the attitude of tax authorities toward the taxpayer’s transfer pricing policy. The taxpayer thus obtains a guarantee from the tax authorities that they will accept the proposed method for determining the transfer pricing used in relatedparty transactions (transactions with related parties
or transactions between a head office and its permanent establishments) for a given period which, in the case of Portugal, is a maximum of three years, renewable at the request of the taxpayer. Because of concerns over double taxation, most countries prefer bilateral or multilateral APAs (i.e. an arrangement in which two or more countries concur), and indeed some countries will not grant a unilateral APA (i.e. an arrangement between the taxpayer and one tax administration) to taxpayers in their jurisdiction. The bilateral (or multilateral) approach is far more likely to ensure that the arrangements will reduce the risk of double taxation, will be equitable to all tax administrations and taxpayers involved, and will provide greater certainty to the taxpayers concerned. It is also the case in some countries that domestic provisions do not permit the tax administrations to enter into binding agreements directly with the taxpayers, so that APAs can be concluded with the competent authority of a treaty partner only under the mutual agreement procedure.6 According to the Portuguese rules, APAs may be unilateral or bilateral or multilateral. It is highly significant that, in addition to unilateral APAs, which involve the taxpayer and the Portuguese tax authorities, provision has also been made for bilateral or multilateral agreements, which involve the tax authorities of other countries under the mutual agreement procedure provided for in double taxation treaties. In deciding how specific an APA can be in a particular case, the Portuguese tax authorities should recognise that predictions of absolute future profit experience seem at least plausible. The APA can pertain to the whole or to part of the company’s operations. The Advance Pricing Agreement process begins with the submission of a draft agreement to the Director of Tax Affairs for a preliminary assessment within the following 60 days. The preliminary phase, during which only limited information is provided by the taxpayer, should result in an informal position from the Portuguese Tax Authorities about: i. the transfer pricing policy of the company(ies)/ taxpayer; ii. the specific circumstances of the operation or operations; iii. a definition of the information and documentation to be provided in the process and iv. to identify the specificities in the negotiation with the foreign tax authorities. The taxpayer may request a meeting to discuss the relevant information and essential documentation. Once the preliminary assessment or the preliminary stage proposal is received, the negotiation process begins, undergoing with at least more three phases: i. proposed agreement (submission of a formal APA proposal), ii. evaluation and negotiation with the Portuguese tax authorities and with tax authorities of other states, where the agreement is multilateral (review of the proposal by the Portuguese tax authorities), and iii. final agreement (acceptance of the final APA by the taxpayer and the tax authorities). The formal APA proposal must be presented to the Portuguese Tax Authorities at least 180 days before the beginning of the tax year to which it applies. The APA proposal should include, among others: i. the identification of the companies
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ii. the related-party status, according to the definition presented in Article 63. of IRC (a company subject to a substantially favourable tax regime or included in the Portuguese offshore blacklist is considered to be a related party, independent of other relatedparty criteria); iii. the characterisation of the taxpayer’s activity or activities and that of the related parties with which it engages in commercial and/or financial transactions; iv. identification of all intercompany transactions, comprising the volume, terms and conditions of the transactions, in the technical, economic, financial and legal point of view; v. the technical studies focusing on essential areas of business; vi. the description of the method used and demonstration of how the prices were calculated; vii. a functional and reasoned analysis for each relevant transaction and method; viii. the identification of the database and other information sources; ix. information about Portuguese and international comparables; x. profits and loss distribution; xi. agreement validity; xii. the legal entity organisation structure and xiii. all intercompany contractual agreements and unrelated-party agreements. For bilateral or multilateral agreements, the taxpayer must submit a copy of the proposal to the competent foreign tax authorities. The Portuguese tax authorities must notify the taxpayer, within 60 days after the proposal is received, whether the proposal has been accepted or rejected, or whether additional information on the controlled transactions is required. Unilateral APAs should be concluded within 180 days from the date of the Portuguese tax authorities’ formal acceptance of the proposal. Bilateral or multilateral APAs should be concluded within 360 days from the date of the Portuguese tax authorities’ formal acceptance of the proposal. The final agreement – acceptance of the final APA by the taxpayer and the tax authorities – covers the drafting and signing of the APA by tax authorities and taxpayer. According to the Portuguese rules, an APA will apply for a maximum period of three years, renewable at the end of that term. Once an APA is negotiated, concluded with success and where the conditions specified therein are respected, the defined price may not be revised, thus leading to greater stability in the operation or operations carried out by enterprises and providing desirable tax stability. Portugal has an extensive network of double tax treaties, all of which follow the OECD Model Tax Convention: Algeria, Austria, Barbados, Belgium, Brazil, Bulgaria, Canada, Cape Verde, Chile, China, Colombia, Cuba, Czech Republic, Denmark, Estonia, Fin-
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land, France, Germany, Greece, Guinea-Bissau, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Qatar, Korea, Kuwait, Latvia, Lithuania, Luxemburg, Macau, Malta, Mexico, Moldova, Morocco, Mozambique, The Netherlands, Norway, Pakistan, Panama, Poland, Romania, Russia, San Marino, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Timor, Tunisia, Turkey, Uruguay, Ukraine, United Arab Emirates, United Kingdom, United States of America and Venezuela.
IV. Conclusion Advance pricing agreements, including unilateral ones, differ in some ways from more traditional private rulings that some tax administrations issue to taxpayers. An APA generally deals with factual issues, whereas more traditional private rulings tend to be limited to addressing 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 tax administration, whereas in an APA the facts are likely to be thoroughly analysed and investigated. In addition, an APA usually covers several transactions, several types of transaction on a continuing basis, or all of a taxpayer’s international transactions for a given period of time. In contrast, a private ruling request usually is binding only for a particular transaction7. An advance pricing agreement increases the competitiveness and security of both taxpayers and tax authorities, since they enable greater transparency in the tax system, making it more predictable for international operations. Transfer pricing rules are significant for both taxpayers and tax authorities because they determine the income and expenses, and therefore taxable profits, of associated enterprises, and, given the current pressure on Portugal to reduce its budget deficit, the Portuguese tax authorities have increased the attention paid to the transfer pricing rules because these inspections tend to result in large tax assessments. Because of the focus on transfer pricing rules it is highly recommended to consider entering into an APA. Alexandre Andrade is a Lawyer and Head of Tax Department of PLEN – Sociedade de Advogados, RL, in Lisbon. He can be contacted at: email@example.com www.plen.pt
NOTES 1 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2010; 2
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