Advance pricing agreements avoid disputes

Luis Coronado, Asia Pacific Area Pricing Leader at Ernst&Young Solutions LLP

Nitin Jain, director of tax and advisory services at Ernst&Young Viet Nam Limited

More and more countries are adopting advance pricing agreements (APAs) since they help resolve potential transfer pricing disputes in a co-operative manner, according to Ernst&Young, a global leader in tax, transaction, and advisory services.

It is expected that APA regulations would be available in Viet Nam in the next few years. In July the General Department of Taxation surveyed taxpayers and tax agencies on transfer pricing on its website to collect information, data, suggestions, and comments on the implementation of transfer pricing regulations in Viet Nam.

Luis Coronado, Asia Pacific Area Pricing Leader at Ernst&Young Solutions LLP, and Nitin Jain, director of tax and advisory services at Ernst&Young Viet Nam Limited spoke to Viet Nam News about the benefits and challenges in applying this programme.

Can you give us a basic definition of APA?

APA is the advance pricing arrangement where you agree on a proposed pricing policy for inter-company transactions.

The APA program allows the taxpayer and the tax authority to avoid future transfer pricing disputes by entering into a prospective agreement, generally covering at least five tax years, on the taxpayer's transfer prices.

What advantages and challenges does APA offer enterprises?

APA looks at the risk mitigation tool wherein you have more certainty that if tax authorities agree, there will be no transfer pricing adjustment in future. So it reduces the uncertainty of whether your transfer pricing policy will be accepted by tax authority or whether there will be any double taxation.

With this certainty, the taxpayer is more confident about future transactions and then can focus on its business rather than dealing with the uncertainty.

In terms of challenges, the question is time and resources because generally APA takes around one to three years to negotiate and conclude.

What are the risks involved in the APA process for taxpayers and tax authorities?

From a taxpayer perspective, there could be a tax payer who goes for an APA, discloses information to the Government about transactions they carry out, details of the transfer pricing procedures, and eventually they decide that for whatever reason they want to pull out from a request.

There is always a possibility that if the same taxing authority that gives you the APA is the same authority that also audits you … you have already given the authority a lot of information for them to continue the case and covert into an audit.

Most of the regulations that we see in the APA arena have a limitation clause that says that the Government should not use any of the information disclosed in the APA for audit procedures. However, it can be very tempting if you already have that information in one part of your brain. That could be one risk from the taxpayers' side.

From the authorities' standpoint, the risks could be that there are limited resources with all of taxing authorities.

Even the US … now it will hire over 800 people in transfer pricing, China has numerous resources in transfer pricing but there is still a need for more transfer pricing officials.

Therefore, if you have a taxing authority with limited resources and you have taxpayers coming and requesting for APAs and down the road half of them say no I really did not want it, you have already spent your precious resources in discussing the case.

In generally, an APA would take between one to three years to negotiate. There is a perceived waste of time by a Government spending and putting together a team of economists, lawyers and accountants for at least six months to a year, and then the taxpayer comes back and says ‘thank you but I decided not to do an advance.'

On the other hand, if this was to be a bilateral case, you can probably mitigate double taxation in most cases but there are still situations where taxpayers and governments do not get to an agreement and you could potentially still develop tax and need go to other records.

What is your recommendation for Viet Nam in applying the APA scheme?

What you will expect from the taxing authorities would be a degree of consistency.

We have seen in very big countries without very strong central guidance for transfer pricing that you have conflicting positions. The same transaction prices may differ between provinces, different from the North to the South. That could create some frustration for taxpayers. I think that as long as Vietnamese authorities can, within their group of auditors, figure out some consistency and communicate to the auditors and say this is our position on contract manufacturing, this is our position on cost sharing, etc, then that would give comfort to taxpayers that there is a degree of certainty when they are negotiating.

That is what the Vietnamese authorities will bring to the table when they are negotiating with other Governments either on a competent authority case or bilateral APA cases.

That would be perhaps one of the suggestions that there is some guidance from the central level as to how the various tax authorities need to work out to avoid having conflicts even within the country. — VNS