Chapter Four

Australia’s Advance Pricing Arrangement Program

Australia Continues to apply its advance pricing arrangement (APA) program. According to the November 2008 APA Program report, Australia increased the issuance of its APAs in 2007–2008 compared with that of prior years. The Australian Tax Office (ATO) completed 48 APAs during the 2008 financial year, comprising these activity categories:

• 30 APAs are renewals that result from existing APAs
• 7 APAs are new APAs that arise as result of the ATO’s compliance activity and the ATO’s involvement in the transfer pricing review and audit process
• 11 APAs are new APAs, unprompted by the ATO

Taxpayers at all size levels can request APAs. These taxpayers include large businesses and small to medium enterprise markets. Large businesses with revenues of more than A$250 million more readily use APAs than do smaller businesses. The ATO completed two-thirds of its APAs with large business taxpayers in 2007–2008 year. The ATO completed the remaining one-third of the APAs with small to medium businesses.

The completed APAs cover a wide range of related party inbound dealings and cover a wide range of related party outbound dealings. These APAs include purchases and sales of these business activities:

• Consumer products
• Medical products
• Business products
• Information technology software and hardware
• Business and management services
• Metals and minerals

The businesses that apply for an APA include these activities:

• Agency permanent establishments
• Distributors
• Service providers
• Toll manufacturers
• Full manufacturers

PRE-FORMAL APA DISCUSSIONS

The ATO encourages potential APA participants to take advantage of discussions with the ATO before the taxpayer files a formal APA application. The taxpayer and the ATO can undertake pre-formal APA discussions to address:

• Whether the case is suitable for an APA
• Preliminary views as to the transfer pricing method
• The information the taxpayer will need to give the ATO so that the ATO can properly look at the APA request before the taxpayer files an APA application

The ATO cautions that many APA proposals are complex or are unique.

Applicants to the APA process must provide these materials to the ATO long before the taxpayer–ATO conference occurs:

• Background material
• Outline of the proposal

The goals of the taxpayer–ATO conference are to achieve these objectives:

• Use the time well.
• Offer considered views.
• Make sure that the most appropriate staff attends.

APA PROCESSING TIMES

The ATO moves rapidly compared with most other tax offices in formulating APAs. Thus, the ATO expects to complete an APA within 12 months after the taxpayer files the application. The ATO expects the taxpayer to cooperate with the ATO and to provide the ATO with timely, detailed, and accurate information. The completion of the APA process within 12 months depends on:

• Availability of information
• Amount of cooperation among the ATO, the taxpayer, and the foreign tax authority, assuming the APA is a bilateral APA
• The APA’s available resources to undertake the APA process

Australian APAs completed in 2007–2008 took, on average, 11 months to process, determined from the inception or filing of the APA to the finalization of the APA. The processing time during the prior year, 2006–2007, was 13 months. The average time to complete the APA depends on whether the APA was unilateral or bilateral:

The processing time to complete the APA in Australia is much less than the processing time in the United States. The disparity in processing times between countries applies to both unilateral APAs and bilateral APAs. The median processing times in Australia were similar to the average processing times.

In 2007–2008, on average, the taxpayer’s renewal APA application took the same time to process as would a new APA application. In contrast, in 2006–2007, a renewal APA application took 30% less time than a new application took.

An APA application in 2007–2008 involving a small and midsize taxpayer took about 60% less time than a large taxpayer APA application took. In contrast, an APA application in 2006–2007 for a small and midsize taxpayer took about 45% less time than for a large taxpayer application.

The ATO permits a small to midsize taxpayer to enter into an APA application process when the ATO undertakes transfer pricing review and/or transfer pricing audit. Small and midsize APA applications were often prompted by the compliance activity on the part of the ATO. These small and midsize APA applications were usually unilateral. The ATO’s knowledge of the business helped to improve processing times for these cases.

APA processing time for bilateral applications increased over the six years beginning in 2002–2003 from 13 to 23 months in 2004–2005 and then decreased to 16 months in 2007–2008. The processing time for unilateral applications ranged from 8 to 12 months. Australia had one multilateral APA application.

According to the ATO, unilateral APA applications are more common. It attributes this high percentage to:

• A unique joint venture arrangement in which bilateral APAs were not appropriate
• Small to midsize businesses, which could not justify the costs of submitting a bilateral APA application

UNILATERAL AND BILATERAL APAS

Australia completed bilateral APA applications with four countries in 2007–2008: Canada, Japan, New Zealand, and the United States. As tax practitioners conversant with developments in the area, we anticipate that Australia will soon be developing bilateral APA applications with Singapore.

The number of total APAs in Australia increased from 20 or fewer APAs per year in the pre-2000, 2000, and 2001 period to 38 in 2005, 27 in 2006, 31 in 2007, and 48 in 2008. Bilateral and multilateral APAs have never reached 20 of Australia’s total APAs. In fact, there were just 4 bilateral and multilateral APAs in 2000. These data reflect program life, including renewals.

THE ATO’S APA WORK IN PROCESS

The ATO divides in APA work in process into these categories:

APA ISSUES AND METHODS

The ATO categorizes APAs by type of activity during the 2007–2008 year:

Several APAs cover more than one type of activity. For example, an APA might cover the selling of tangible property and the receiving of management services. The ATO lists the primary activity first and totals all covered activities in the right-hand column. The broad categories encompass these activities:

• Sales and purchases of goods, made by marketers, distributors, and manufacturers
• Sales of commodities and sales of semicompleted goods
• Licensing of intellectual property
• Services, including financial services and research and development
• Management services and other support services

The APA process in Australia involves the selection of primary transfer pricing methods. As in previous years, taxpayers and the ATO primarily use the transactional net margin method (TNMM). Taxpayers in Australia have ready access to independent comparable data in Australia and elsewhere to show that their related party dealings achieve an arm’s length outcome. The tested party might be in Australia or elsewhere, depending on the facts of the case. The taxpayer can also use the TNMM to establish routine returns in a residual profit split:

The taxpayer should note that Australia’s primary methods do not include the resale method.