ATO response to PwC Legal report on the APA Program review

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The purpose of this paper is to provide the Tax Office's response to the findings by PricewaterhouseCoopers Legal (PwC Legal) in its report on the Tax Office's Advance Pricing Arrangement (APA) Program and the work undertaken to date to implement recommendations made. The PwC Legal report may be viewed on this website.

The Tax Office commissioned PwC Legal as an independent third party to review and evaluate the Tax Office's APA Program and provide recommendations to improve the effectiveness and efficiency of the Program. The review involved seeking feedback from a variety of stakeholders including taxpayers, tax advisers, industry groups and Tax Office personnel through surveys, group forums, interviews and written submissions. In order to ensure the anonymity of taxpayers and their advisors the scope of the review did not include commentary on, or investigation of, any individual APA cases.

The Tax Office would like to thank PwC Legal for their recommendations and the taxpayers and advisers who took the time to provide feedback.

An APA provides taxpayers with the opportunity to enter an agreement with the Tax Office on the future application of the arm's length principle in their dealings with international related parties. The arrangement establishes the transfer pricing methodology to be used. It may be reviewed if the trading circumstances of the taxpayer change materially. APAs generally apply for a period of 3 to 5 years. As at 31 May 2009 the Tax Office had in place 67 APAs with large business and 59 with small to medium enterprises.

The PwC Legal review found that the APA Program enjoys strong support from stakeholders in the taxpayer and adviser community and within the Tax Office. The report concludes that:

'Overall both the ATO and external stakeholders view the APA processes as extremely important and both parties are very supportive of the program and its value.' (Executive Summary, Page 2)

Whilst the report identifies a number of areas of the APA Program for improvement PwC Legal acknowledges that the Tax Office had proactively introduced an enhanced transfer pricing management system in mid 2007 which addresses the majority of these areas. The new management system establishes a uniform approach to the management of transfer pricing throughout the Tax Office, including processes to ensure the quality and consistency of transfer pricing work and develop capability in transfer pricing via a technical network.

The report states that:

'Combined with the recommendations set out in this report, the enhanced transfer pricing management system, on full implementation, will provide the ATO with a platform to move towards world's best practice.' (Executive Summary, Page 2)

The APA Program is part of the Tax Office's balanced program of advice and assurance. APAs are usually negotiated in a cooperative environment and provide complementary benefits to both taxpayers and the Tax Office including greater certainty, reduced compliance costs (when compared with audit) and reduced risk of audit and penalties.

In examining the stated purpose and benefits of the Tax Office's APA Program the PwC Legal report states that:

'Almost all stakeholders, ATO and external from all sources of data agreed with the stated purpose and objectives of the ATO's APA Program.' (Section 5 - Facts and recommendations, Page 27)

Specific results from the PwC Legal survey found that over 90% of the taxpayer community surveyed agreed that an APA provides taxpayers with reliable guidance and certainty on the application of the transfer pricing law in an area that can be problematic. Approximately 80% of the taxpayer community surveyed agreed that an APA provides tax authorities and taxpayers with a flexible, cheaper process (relative to audit) to achieve compliance or to obtain assurance that the arm's length principle is being complied with.

The PwC Legal report identified 14 key recommendations intended to reinvigorate the program, to improve its relevance to the needs of industry and make it more sustainable in the long term. The Tax Office agrees with the broad thrust of the recommendations but does not necessarily agree with each of the specific sub recommendations. For detail on each of the key recommendations and the Tax Office's response, refer to Attachment 1.

In their report, PwC Legal assess the current state of the Tax Office's APA Program against PwC's Global APA Best Practice principles, a hypothetical model which aspires to world's best practice. The numerical ratings in the report should be interpreted with care as they do not represent measurement against an existing APA Program. Australia's current program compares favourably with programs overseas in terms of cases finalised per year, cycle times and range of transactions covered by APAs, particularly in the SME market.

The Tax Office also notes the adverse feedback about large business restructure cases in the APA Program. The Tax Office must act in a manner that preserves the integrity of the tax system, this will mean that on occasions we disagree with taxpayers. These are extremely complex arrangements in which Australian based operations are restructured to shift businesses or parts of businesses and their profits offshore, often to low tax jurisdictions, potentially reducing Australian taxes by hundreds of millions of dollars per year. Complex transactions of this type and their tax consequences must be fully understood by the Tax Office before the terms of an APA can be agreed.

The PwC Legal report was initially released with the Tax Office's draft response for discussion with representatives at meetings of the Large Business Advisory Group (LBAG), a new consultative forum between large business and the Tax Office, and the National Tax Liaison Group Transfer Pricing (NTLG TP) Sub-Group, the main body for consultation between the Tax Office and the community on transfer pricing matters. The purpose of the discussions was to identify priorities for the implementation of the report recommendations and additional measures to make the future APA Program relevant to the needs of industry, which included:

• Agreement in advance on the scope of the APA
• Co-design of a process for negotiating complex/high risk APAs

An APA Co-design Committee was established in January 2009 as a sub-committee of the NTLG TP Sub-Group. It is made up of representatives from the chartered accounting firms, the Corporate Tax Association and the Tax Office and is responsible for co-designing aspects of the APA Program from the following sources:

• PwC APA Review report recommendations
• Priority issues identified from consultation with the LBAG and the NTLG TP Sub-Group
• Tax Office recommendations

A cross business line APA Implementation Committee has been established to oversee the implementation of the project. The Committee is responsible for agreeing the Tax Office's preliminary position for input into each stage of the co-design process and it reports to the Transfer Pricing Steering Committee and the NTLG TP Sub-Group throughout the process.

The co-design process is working well, with the business community and Tax Office members contributing equally, and it is expected to be completed by the end of the 2009 calendar year. The Committee is working on a number of projects to be integrated with the Transfer Pricing Management System and incorporated into a comprehensive APA guide for taxpayers, together with updated material from previous taxpayer publications on the APA Program. These projects include:

• Identifying the issues to be agreed in advance between the Tax Office and the taxpayer on the scope of an APA during the pre-lodgement phase. These include the international related party transactions to be covered by the APA, the Tax Office products to be used to resolve other tax issues related to the covered transactions or arising during the period prior to the APA.
• Developing guidelines for a differentiated APA Program, including a simplified APA and a streamlined APA rollover or extension product for renewal of APAs with low risk related party dealings and revising previous criteria for acceptance into the APA Program to focus on higher risk international related party transactions.
• Developing a project management framework for all APAs, whether complex/high risk or simplified, supported by a written APA Case Plan. The Case Plan is to be agreed between the Tax Office and the taxpayer to set out the role and responsibilities of the APA Case Leader, identify the information required from the taxpayer, the timeframes and the decision points during the process at which the APA is subject to a Transfer Pricing Review Panel.
• Establishing a circuit breaker/review mechanism which provides taxpayers with a right of review of Tax Office decisions where a standstill has been reached or the Tax Office intends to withdraw from the APA process.

The Tax Office intends to discuss extending appropriate improvements arising from the PwC Legal APA Review to its bilateral programs with Australia's tax treaty partners. Australia has also identified opportunities for streamlining Australian bilateral transfer pricing processes as a basis for multilateral discussions with other Joint International Tax Shelter Information Centre member countries.

Attachment 1

PwC Legal recommendations on the Tax Office's APA Program and the Tax Office response

No	Recommendation	Tax Office Response	Status as at 31 May 2009
1	ATO to continue to promote and use APA Program as a tool for cooperative compliance with taxpayers	Agreed. The Tax Office continues to promote the use of the APA Program. The Tax Office is consulting with industry and their tax advisors on an appropriate marketing and communication strategy.	The Tax Office is developing a marketing and communication strategy to provide guidance to taxpayers and staff on the benefits of entering into an APA and to promote the reinvigorated APA Program. The strategy will include communication through a comprehensive web-based APA Guide and an APA Booklet which we anticipate being released by December 2009. The APA Co-design Committee is contributing to the strategy.
2	Ensure full implementation of enhanced transfer pricing management system introduced mid 2007	Agreed. The enhanced Transfer Pricing Management System, which includes the establishment of a Transfer Pricing Network, was introduced in mid 2007. The Transfer Pricing Management System is now operational.	The enhanced Transfer Pricing Management System has already improved the following aspects of the APA Program where problems were identified in the report: The Transfer Pricing Operations Group monitors the progress and project management (Recommendation 9) of transfer pricing casework including APAs, and ensures that specialist staff are involved from the outset in complex cases. Where appropriate, high risk or complex cases will be escalated to the Transfer Pricing Steering Committee and the Special Adviser Transfer Pricing or the Deputy Commissioner, LB&I (Case Leadership) may be engaged. (Recommendation 8). A Transfer Pricing Gatekeeper has been established by the Transfer Pricing Operations Group to allocate transfer pricing casework to the most appropriate team based on the complexity of issues under review (Recommendation 7). The Transfer Pricing Network operates throughout the Tax Office and organises formal training, technical forums and case workshops relevant to casework to ensure that officers understand the technical implications of their casework and are familiar with best practice. Regular phone hook ups and electronic bulletins provide timely technical updates on topical issues including litigation (Recommendation 11).
3	Continue promoting the stated purpose and benefits as published in the ATO's APA Program 2004-05 update. Update and ensure they are 'experienced' by all stakeholders	Agreed. The Tax Office notes that the review identified that a clear majority of stakeholders agree on the stated purpose and objectives of the APA Program.	The marketing and communication strategy (Recommendation 1) will further promote the stated purpose and benefits of the APA Program. The APA Co-design Committee is working on a number of aspects of the APA Program which will be incorporated into the comprehensive APA Guide for taxpayers (Recommendation 1)
4	Further promotion/relaunch of specific guidance to taxpayer community surrounding admission criteria and acceptance into the APA Program	Agreed. At present 'TR 95/23 Transfer Pricing - Procedures for bilateral and unilateral APA' provides guidance on admission and acceptance criteria. The Tax Office accepts the recommendation that the existing procedures and processes included in TR 95/23 require updating.	Through the APA Co-design Committee, we are developing improved guidance on the 'Entry' and 'Renewal' requirements for an APA. We are also addressing the APA acceptance criteria and streamlined rollover procedures, which will be set out in the web based 'APA Guide'.
5	Consistency and certainty in ATO's APA five step process	Agreed. The enhanced Transfer Pricing Management System (Recommendation 2) and the Transfer Pricing Review Panel ensure that common transfer pricing issues between cases are dealt with consistently through a controlled case allocation process, workshopping complex cases and introducing the Special Adviser Transfer Pricing or the Deputy Commissioner, LB&I (Case Leadership) at appropriate intervals. In addition, the Transfer Pricing Network, as part of the Transfer Pricing Management System, is building technical capability through a combination of formal and informal training and on the job experience under the supervision of experienced staff.	The Tax Office is clarifying the APA 5 Step process through the APA Co-design Committee, including considering the establishment of: A circuit breaker/review mechanism when negotiations reach a standstill; An independent internal review process which can be requested by the taxpayer when the Tax Office withdraws from the APA process. The purpose of the clarification is to develop a set of guidelines which will improve the mutual trust and co-operation between the Tax Office and taxpayers.
6	Definition, clarification of relevance, certainty and timeliness of the sharing of information	Agreed. The Tax Office has established an APA Co-design Committee, which is assisting in development of a set of guidelines to identify the information requirements. The Tax Office's Transfer Pricing Operations Group is responsible for administering and monitoring APAs across the Tax Office. This group of senior staff from the compliance business lines collectively monitors the project management of APAs including information requirements, the timely flow of information and workshopping technical issues arising from the information received.	Through the APA Co-design Committee, the Tax Office is developing tiered information requirements for the APA Program to ensure they are proportionate to the size, complexity and risk associated with APA cases. In cases judged to be complex or high risk the Tax Office will require an appropriate level of information to ensure that the full facts and commercial aspects of the arrangements are understood. The APA Co-design Committee is considering proposals for the electronic lodgment of APA applications and standardised APA Annual Compliance Reports.
7	Consistent and appropriate APA teams with decision makers determined at the outset	Agreed in part. The Tax Office agrees that, as far as practical, decision makers should be determined at the outset with appropriate APA teams. However, the concept of a single Tax Office 'decision maker' for an APA is inappropriate for a number of reasons. For example, complex technical issues are escalated to appropriate specialists for resolution. The taxpayer will have access to appropriate Tax Office decision makers. The Tax Office has a dedicated Transfer Pricing Gatekeeper established by the Transfer Pricing Operations Group to ensure APA applications are allocated to the correct team in a timely manner. The Transfer Pricing Operations Group ensures that APA cases are appropriately allocated by the Gatekeeper, managed to the case plan and that specialist staff are engaged as early as possible.	The Transfer Pricing Management System (Recommendation 2) is ensuring early engagement of appropriate specialist and sufficient resourcing. External members of the APA Co-design Committee have advised that taxpayers prefer to have a single Tax Office contact point who is responsible for liaison between the Tax Office and the taxpayer at all times throughout the APA process. The APA Co-design Committee will have input into the role and responsibilities of an APA Case Leader, in particular for explaining the Tax Office position on technical issues, involving appropriate specialists in that discussion.
8	Scope of APA should be agreed upfront including the timing and role of Deputy Commissioner, LB&I (Case Leadership)	Agreed in part. The Tax Office agrees that, where possible at an early stage in the 5 Step Process, an agreement in advance be reached on the scope of the APA negotiations. However, for some transactions, particularly where there are tax implications in addition to transfer pricing, an APA will not be the most appropriate Tax Office product to reach agreement with the taxpayer as it relates only to the transfer pricing methodology to be used, and does not address other tax risks. The Transfer Pricing Operations Group ensures that appropriate specialists are involved from the outset in high risk or complex APA cases. These cases are escalated to the Transfer Pricing Steering Committee, the Special Adviser Transfer Pricing or the Deputy Commissioner, LB&I (Case Leadership) where appropriate. (Recommendation 7).	The scope of an APA is being addressed through the APA Co-design Committee including parallel processing of collateral issues. Details will be set out in the APA Guide.
9	Establish a detailed project plan with the taxpayer that is adhered to and amended where necessary	Agreed. APA project plans developed for complex, high risk APA cases require flexibility and ongoing review in order to deal with the demands of foreign jurisdictions, shifting market conditions, information provisions and emerging technical issues.	The APA Co-design Committee will provide input to a project management plan framework (APA Case Plan) which can be fully developed by the taxpayer and the Tax Office at the commencement of APA discussions.
10	Use a Stage and Gate process to progress through an APA	Agreed in principle. The Tax Office agrees in principle that the project plan should incorporate stage and gate aspects but it must also allow flexibility. Current project plans include periodic Transfer Pricing Review Panels which assess the technical direction and information requirements of the case. The chair of the review panel guides the case through its planned stages. Review panels are chaired by senior and experienced transfer pricing staff. However, it should be noted that the application of the stage and gate process cannot be so rigid that it would undermine the integrity of the APA Program.	The Tax Office will ensure that APAs are subject to Transfer Pricing Review Panels (which incorporate Stage and Gate aspects) at key decision points throughout the APA process. Stage and Gate processes are still being considered further by the APA Co-design Committee.
11	Further training, education and practical experience of ATO personnel on technical transfer pricing issues	Agreed. The Tax Office has already established a Transfer Pricing Network as part of the Transfer Pricing Management System to build Transfer Pricing capability by a combination of formal and informal training and on-the-job experience under the supervision of more experienced staff.	The Transfer Pricing Network will extend these capability building activities. A transfer pricing capability strategy is being developed and implemented to ensure the sustainability of the APA Program. The APA Co-design Committee has provided input into the strategy which will ensure that case officers have: The competencies required to lead an APA. The appropriate level of Transfer Pricing technical skills and experience required to negotiate different types of APAs.
12	Use a 'co-design' approach with appropriate ATO and external stakeholders to refine/ remodel the ATO APA Program to implement the recommendations outlined in this report	Agreed. The Tax Office has established an APA Co-design Committee. The Committee members represent taxpayers, tax advisors, professional firms and industry. The Committee is governed by Charter which clearly identifies purpose, roles and responsibilities. The first Committee meeting was held on 29 January 2009.	The Tax Office is engaging the APA Co-design Committee throughout the design, development and implementation of strategies and products to achieve international best practice in Australia's APA Program. The co-design process is working well with external and internal members contributing equally to progress.
13	Simplified or standardised APA options	Agreed. The Tax Office agrees with the need to design APA products and processes for taxpayers with low risk related party dealings.	A simplified APA process for low risk international related party dealings has been developed by the APA Co-design Committee, together with a streamlined rollover product for APA renewals. In addition, a risk profiling framework for APA requests (as an alternative to the use of safe harbours) is being proposed for further development through the APA Co-design Committee.
14	Implement a 'balanced score card' approach to evaluate performance of APA Program and individual APAs, including a combination of qualitative and quantitative factors	Agreed. The Tax Office currently produces an annual report on the stocks and flows of the APA Program for external publication. We also report on the cycle times for each APA product (i.e. unilateral, bilateral and multilateral).	The Tax Office will update benchmarks and performance indicators for the APA Program. Appropriate new measures, including measures of compliance effectiveness, sustainability and acceptance will also be added to our reporting template to achieve a balanced score card assessment.