Prior price agreement
What exactly is an advance pricing agreement (APA)?
According to the statistical data published by the National Revenue Administration of June 30, 2022, the number of Advance Pricing Arrangements (APAs) is constantly increasing. Due to the fact that capital ties between entities may, for various reasons, result in the determination of settlement rules that would not be accepted by entities acting independently, and which may translate into the amount of income from public levies, many legislations, including national ones, introduce a number of allowing for the control of the “market-likeness” of settlements between related entities and various types of sanctions related to potentially detected irregularities.
Apart from control measures and sanctions, however, there is an instrument in Polish legislation that allows for concluding an agreement with the tax authorities specifying the methods and level of transfer prices in advance, i.e. before making their tax settlement. The agreement in question is a type of agreement concluded between the taxpayer and the tax authority, in which the authority accepts the choice and manner of applying the transfer pricing method used in relations between the taxpayer and its related entities. The authority competent to conclude an advance pricing agreement (APA) is the Head of the National Revenue Administration. Finally, the agreement takes the form of an administrative decision.
What are the benefits of an advance pricing agreement (APA)?
The advance pricing agreement is an adequate tool to prevent disputes arising from the transfer pricing. It should be noted that the risk of transfer pricing control is mentioned by many professional managers as one of the main tax risks for their activities within related entities within capital groups. This is due to the fact that many entrepreneurs have undergone an inspection of this scope of activity or are expecting it in the near future, and tax inspection proceedings end in a large part of cases with questioning the method of determining transfer prices along with estimating the amount of income.
An advance pricing agreement may eliminate or significantly reduce the above risk. APA, as an agreement concluded for the future, which may be in force for up to five years, can organize and ensure security in terms of determining transfer prices, including for the so-called “difficult” or unusual transactions. An entrepreneur striving to conclude an advance pricing agreement with the Head of the National Revenue Administration may count on the protection of data that he makes available to the tax authority during the procedure aimed at its conclusion. The data in question is not made public.
Types of price agreements
Among the types of advance pricing agreements (APA), one should point out unilateral (domestic), bilateral and multilateral agreements – which extend their effects and ensure security in relation to transactions between entities that are taxpayers in different countries. The procedure of concluding an advance pricing agreement consists mainly of 3 stages: the introductory part covering the preparation of the application along with the completion of the necessary documentation, stage II covering arrangements with the Head of the National Revenue Administration, and in the case of multilateral agreements – together with the foreign administration, and stage III covering the issuance of a decision .
An advance pricing agreement is a legal measure that allows entrepreneurs to optimize the tax risks of their business activity. At the same time, the procedure of concluding the agreement in question requires careful preparation in terms of collecting the appropriate documentation, analysis of the proposed solutions and formal proceedings before the Tax Authority. Due to the above, we recommend in this case to use the services of a professional law firm in close cooperation with an experienced tax advisor.
Scope of services for prior price agreement
Consultancy in the field of transfer pricing is, in particular:
Preparation of APA application
The first step is to prepare and submit an application for an APA to the relevant tax authority. The application should include detailed information about the company, related transactions and the proposed transfer pricing methodology.
Preparation of documentation confirming compliance with the terms of the APA
Prepare documentation to confirm that related transactions are conducted in accordance with the terms agreed to in the APA.
Preparation of annual compliance reports
The company must prepare and submit annual compliance reports that confirm that the terms of the APA are being complied with.
Negotiations with the tax authority
The application is followed by a stage of negotiation with the tax authority. The goal is to agree on an acceptable transfer pricing methodology to be used in future related transactions.
Monitoring of APA conditions
The company needs to monitor its related transactions and the economy in general to make sure that the terms of the APA are still appropriate.
Renegotiation and extension of the APA
Before the expiration of the APA, the company should consider renegotiating and extending the agreement if the conditions of the economy or the company have changed.