How an APA works
The business proposes a transfer pricing method and expected outcome for a transaction, supports it with analysis, and negotiates it with Inland Revenue. Once agreed, the APA covers a number of future years. Each year the business reports that it has complied with the agreed terms. Provided it has, Inland Revenue does not reopen the pricing of that transaction.
Unilateral versus bilateral
A unilateral APA is agreed with Inland Revenue only. It gives certainty in New Zealand but does not bind the other country’s tax authority. A bilateral APA is agreed by both authorities under the mutual agreement procedure in a tax treaty. It takes longer and involves more people, but it removes the risk of double taxation on the covered transaction.
When it is worth it
- The transaction is large enough that an adjustment would be material, for example a significant inbound loan or a royalty on most of the New Zealand entity’s revenue.
- The arrangement is unusual and comparables are thin, so an annual argument is likely.
- A review or dispute has just concluded and you want the agreed position to carry forward.
- Two tax authorities take different views and you need both to agree.
What it involves
A feasibility assessment, usually a pre-lodgement meeting with Inland Revenue, a formal application with the economic analysis, negotiation, and then annual compliance reporting. TPTS’s partners have negotiated APAs for clients, including one covering a significant inbound loan, and have made competent authority applications where bilateral agreement was needed.
General information, not advice on your situation. Talk to a partner before acting on it.
