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February 27, 2014

The increased focus of the UK Tax Administration (HMRC) on transfer pricing has led to a noticeable increase in the number of businesses seeking the certainty of transfer pricing arrangements through an Advance Pricing Agreement (APA) or an Advanced Thin Capitalisation Agreement (ATCA[1]). Forty-five APAs were applied for in 2012/2013 with 27 being accepted during the year and this number is set to increase in 2013/2014.

The HMRC relaxed the complexity / materiality criteria for APA / ATCA qualification in 2011/2012 and this has contributed to increased interest in the APA programme; recent experience has shown that there have been a few important changes in the approach of APA inspectors that businesses should be aware of.

Informal “Pre-Filing” Discussions
HMRC recommends that businesses interested in applying for an APA contact them first to informally discuss plans before presenting a formal application. There will be one of two outcomes arising from this pre-filing meeting:
  • HMRC will agree that the transactions are material/complex enough to warrant a formal APA treatment and will then set out key areas of analysis that will need to be performed to support the tested transactions. An agreement will be for three to five years and is invaluable to businesses helping to manage tax spend, tax adjustment risk and audit concerns.
  • HMRC will take the view that transactions are not material/complex and the transactions are treated as “low risk.” With the involvement of local inspectors from HMRC responsible for tax audits, this is a useful, albeit informal, method for ensuring that the transactions will not be challenged.

Collaboration with Other Tax Administrations
HMRC has demonstrated an unwillingness to enter into a Unilateral APA (i.e. an APA with HMRC that will not involve the corresponding tax administration) where they have a strong working relationship with the relevant tax administration (specifically the U.S. and Japan). Collaboration and exchange of information is increasing and this has created a desire from HMRC to be transparent with their dealings. An increase in bilateral APA requests relating to India, China and Africa has also led to an appetite to increase experiences with these territories in preference to a unilateral approach.

APAs and Planning
The Base Erosion through Profit Shifting initiative (BEPS) has contributed in part to an increase in use of the UK as a principal company for European structures. The UK is seen as lower risk due to the ability to demonstrate economic substance and commercial drivers. Historically, the APA process was often utilised where there had already been some kind of audit challenge/dispute. However, the landscape is starting to change and HMRC is now providing APAs that are linked to planning around UK centralisation of functions. This is one area where a unilateral approach has been deemed appropriate.

An open discussion with your local inspector as part of the ongoing risk assessment process will be a good segue into a possible APA pre-file meeting. The upside will be reduced risks of a transfer pricing challenge, greater control over tax spend and greater control of the year end audit process in which the subjectivity of transfer pricing can lead to large uncertainty provisions. The downside is a commitment of management time resources that would probably be expended in any case on a forthcoming transfer pricing audit.


Tom McFarlane
Managing Director
+44 207 072 3201

Richard Syratt
Managing Director
+44 207 863 4722

For More Information:
Transfer Pricing


[1] ATCAs relate to intra-group finance structures and come within the APA legislation. However, the ATCA process is administratively separate to the APA process and all ATCAs are unilateral.