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  • Comparison between audit and advance pricing arrangement features

    PS LA 2015/4 Advance Pricing Arrangements was released on 23 July 2015, replacing PS LA 2011/1.

    The key changes include:

    • delivery of a more balanced approach understanding the totality of the cross-border dealings
    • a differentiated and more tailored approach to suit the taxpayer’s circumstances
    • deliberate 'early engagement' stage with a more rigorous approach if necessary
    • greater focus on identifying and appropriately considering collateral issues.

    Paragraph 16 of PS LA 2015/4 explains the interactions between APAs and ATO audits. An APA does not preclude a taxpayer from an audit of its business overall.

    We treat audits and APAs separately, unless your facts and circumstances are sufficiently alike to enable the methodology used in the APA to be applied to the income years under audit.

    However, we will not undertake an audit (aside from the annual compliance review process required under an APA) in relation to cross-border dealings which are the subject of an APA. This is so unless we have reason to believe that you have omitted or provided incorrect information that is material and relevant.

    As a result of the questions from tax agents, we prepared the following table in response. It highlights the difference between the key features of an audit and an APA. This will assist taxpayers in determining the suitability of an APA to their circumstances.

    Key features comparison of audits and advance pricing arrangements



    Advance Pricing Arrangements (APA)

    Issues and period covered

    Transfer pricing can be the only audit issue or one of many. The time period of the audit is approved by the audit panel and relates to transactions already undertaken.

    An APA does not preclude you from an audit of your business overall. However, we will not undertake an audit in relation to cross-border dealings which are the subject of an APA unless we have reason to believe that you have omitted or provided incorrect information that is material and relevant.

    APAs can cover all international-related party transactions or several types of transactions in a set period of time (that is, the agreed APA period).

    APAs apply to prospective transactions and the period of time depends on the industry, products or transactions involved.


    You and your related entities (if applicable) are profiled and a plan is created.


    • consider the risk and issues
    • consider the application of the multinational anti-avoidance law (MAAL)
    • will contact you and request information
    • address the risks
    • escalate the risks if appropriate
    • may consult with subject matter experts
    • continue to communicate with you during this process
    • determine treatment
    • finalise our position
    • present our position and discuss it with you
    • we will issue our position paper
    • communicate the outcomes to you
    • prepare amendments or assessments (or both) if applicable.


    PS LA 2015/4 sets out the Commissioner’s practice and procedures and provides guidance to ATO staff dealing with APA requests.

    A summary is as follows:

    • a request for APA early engagement form is completed
    • triage
    • preliminary discussions with you
    • request review workshop
    • the application of the multinational anti-avoidance law (MAAL), diverted profits tax (DPT) or other collateral issue is considered
    • if the workshop agrees for APA to proceed then an invitation to lodge letter is issued
    • formal APA application is submitted with supporting documentation
    • we update our profiling of you and your entities
    • initial ATO position for QA workshop
    • if applicable, we will obtain further information and undertake discussions with you
    • our position is finalised
    • negotiations are conducted
    • we will communicate the outcomes to you
    • if no agreement is reached, we will withdraw from negotiations
    • if agreement is reached the APA document states the matters agreed upon
    • as part of the APA terms, an Annual Compliance Report (ACR) is required to be lodged in addition to the tax return. 


    Benchmark timeframe

    We expect to complete an audit within 18 months, assuming we receive your full cooperation.

    Benchmark maximum is 6 months for early engagement and 18 months for APA Application plus the ongoing monitoring and compliance through ACRs.

    However, the timeframe is tailored to meet specific circumstances of the APA. Whether the request is an initial request or a renewal is also a factor.

    Global value chain

    Profiling and evidence gathering extending to relevant jurisdiction are undertaken to determine your relative contributions to the value chain.

    Facts gathered including background, organisation structure, behaviour at a global level.

    This information is used throughout the audit as part of our analysis of the risks identified.

    Profiling of similar extent is also completed for APAs.

    Functional interviews

    Functional interviews (extending to other relevant jurisdiction) are essential for us to gather a detailed understanding of the global value chain, in particular the presence you have in Australia.

    They also help us understand the functions, assets and risks of relevant parties in related party dealings.

    Functional interviews are still conducted for an APA. However, if an APA is relatively simple, they may be streamlined to confirm there are no material changes.

    Level of evidence

    A high level of evidence is required to complete our statement of audit position (SOAP), for example, the vouching invoices and obtaining source documents.

    Evidence is not required to the same level of detail as audits but it will depend on the case. Such information may include: the global value chain, financial statements, transfer pricing documents, intercompany agreements, management accounts and board papers.

    However, if an APA is withdrawn from the program (either by you or us) and there is a recommendation that it goes to audit the level of evidence required will be increased. We can use the factual information disclosed in the APA process for subsequent audits.

    Use of formal powers

    We aim for constructive conversations with you to gather information and reduce the need for formal powers. However, we may send you a formal notice under Section 353-10 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to gather information in a timely manner or where we have not received your full cooperation. Formal powers may also be used to protect you and third parties.

    The APA process is a cooperative one requiring mutual trust between the parties to achieve an effective outcome. This requires each party to act transparently. In particular, each party is to disclose all relevant and material facts. Therefore, formal powers are not used in the APA process as the use of them would be inconsistent with the intent of the APA process.

    Exchange of Information (EOI)

    As above, we try and gather information in a cooperative approach. However, due to the increased focus on international issues we may collect information and documents located offshore by an EOI with other jurisdictions under various arrangements.

    It is not our practice to use EOI due to the mutual expectations discussed above about transparency. If relevant information is not provided, we may withdraw from the APA process.

    Risk Hypothesis

    A risk hypothesis is essential to determine the scope of the audit and identifies the risks to be addressed in the audit. Generally, for transfer pricing audits the risk hypothesis is the pricing does not reflect an arm’s length return and it gives rise to a transfer pricing benefit.

    A risk hypothesis is used to address collateral issues only.

    Justified Trust

    An audit may be one part of a tailored assurance approach to achieve justified trust.

    Four key focus areas are reviewed to achieve justified trust:

    1. understanding your tax governance framework
    2. identifying tax risks flagged to the market
    3. understanding significant and new transactions
    4. understanding why the accounting and tax results vary. 


    The concept is still embraced in an APA as we need to be comfortable that any material risks are covered and get a holistic understanding of your business operations and financial performance which would include the global value chain.


    The audit process is dependent on how you interact with us.

    Full cooperation will reduce the likelihood of long delays.

    Full cooperation and transparency with us reduces the likelihood of large information requests.

    Both parties must have mutual trust to achieve an effective outcome.

    Position Paper

    An audit position paper presents our position to you and you are given the opportunity to respond.

    A statement of audit position (SOAP) is essential for us to communicate our position to you after considering any areas of disagreement raised by you in your response to the audit position paper (if applicable).

    A position paper is used (and exchanged) when negotiating bilateral APAs (BAPA) with foreign jurisdictions. It can be used for unilateral APAs (UAPA) depending on the circumstances. A discussion paper may also be used in BAPAs to work through issues.


    A settlement can occur at any stage of the audit process or during an objection or litigation. Settlement may occur on one issue, multiple issues or all the issues in dispute.

    The result of an APA is similar to a settlement. BAPAs are arrived at a mutual agreement under the relevant treaty and UAPAs are agreed by virtue of the general power of administration.

    However, APAs include ongoing annual compliance reporting (ACRs) requirements to evidence compliance with the APA terms.


    If you are dissatisfied with a decision, we have a range of dispute resolution strategies to resolve issues as soon as possible:

    • direct contact and negotiation – our preferred way
    • alternative dispute resolution – cost-effective, informal and quick way using an independent third party
    • settlements
    • independent review – independent senior officer from Review and Dispute Resolution (RDR)
    • objections – review officer, independent of the original decision-maker
    • litigation – elect to have the decision reviewed by the Administrative Appeals Tribunal (AAT) or appeal the decision to the Federal Court. 


    If you are dissatisfied with a decision and the issue cannot be resolved by both parties, you can seek internal review. The internal review is undertaken by the head of the PMU or another senior officer with no prior involvement in that APA process.

    If you are still dissatisfied, you can seek a further review by the head of the APA program.

    Types of APAs

    There are 3 types of advance pricing arrangements (APAs):

    1. Bilateral APA
    2. Multilateral APA
    3. Unilateral APA

    Bilateral APA

    A bilateral APA is an arrangement between our competent authority (CA) and the CA of a tax treaty partner country. The Australian CA is a specifically delegated position within the ATO and is authorised to negotiate bilateral APA cases.

    The respective CAs enter into an APA under the mutual agreement procedure (MAP) article of the relevant tax treaty.

    The CA of each treaty partner country confirms the terms of the APA in writing through a letter or similar document with their resident taxpayer and agrees to be bound by those terms.

    A bilateral APA will give a similar assurance to the foreign entity dealing with the tax administration at the other end of the transaction. 

    Multilateral APA

    A multilateral APA is an arrangement between the relevant taxpayers, the ATO CA and the CAs of more than one tax treaty partner and binds all the parties.

    Unilateral APA

    An APA between the taxpayer and the ATO is referred to as a unilateral APA where the APA does not involve or require agreement with the CA of a tax treaty partner country.

    A unilateral APA will provide you with an assurance that we accept the treatment you gave to the covered dealings during the periods of the APA.

    Economic double taxation can arise under a unilateral APA where the tax administration of the foreign country forms a different view of the application of the arm's length principle to the cross-border dealings covered by the APA.

    If there is a tax treaty between the foreign country and Australia, the Australian CA will seek to support the transfer pricing outcomes of the unilateral APA during CA discussions.

      Last modified: 09 Aug 2022QC 43088