Show download pdf controls
  • Comparison between audit and advance pricing arrangement features

    We released Law Administration Practice statement PS LA 2015/4 Advance Pricing Arrangements 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.

    With the changes to the competent authority (CA) network and the reinvented APA program, we conduct an annual APA conference. We invite representatives from each of the Big Four accounting firms and other firms who represent over 85% of taxpayers that lodge APA requests. Tax agents have previously raised a few issues and questions, including:

    • How are advisers supposed to sell or encourage the APA product to clients if it is essentially the same process and rigour as if they were going through an audit?
    • Given the depth of questioning, it is likely that the end result of both processes is the same methods and same comparables. This seems like a waste of effort on both sides.
    • The level of questioning for some APAs seems more appropriate in an audit framework or approach.

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

    We are to treat audits and APA development separately. This is unless your facts and circumstances are sufficiently similar 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 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:

    • the risk and issues are considered
    • the application of the multinational anti-avoidance law (MAAL) is considered
    • we will contact you and request information
    • the risks are addressed
    • risks are escalated where appropriate
    • subject matter experts may be consulted
    • we will continue to communicate with you during this process
    • treatment is determined
    • our position is finalised
    • we will present our position and discuss it with you
    • we will issue our position paper
    • we will communicate the outcomes to you
    • we will prepare amendments or assessments (or both) if applicable.


    Practice Statement Law Administration (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
    • 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
    • the application of the multinational anti-avoidance law (MAAL) is considered
    • 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 and finalise the APA request
    • 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. It also requires our case manager to purposefully manage the case.

    Benchmark maximum is six 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 is completed to determine broad knowledge of you and your group, including background, organisation structure, behaviour at a global level and to understand the Australian entity (or entities) involvement in the global value chain. This information is used throughout the audit as part of our analysis of the risks identified.

    Profiling is also completed for APAs. However, the information will not be to the same depth as an audit.

    Functional interviews

    Functional interviews are essential for us to gather a detailed understanding of the global value chain, in particular the presence you have in Australia. They also assist in understanding 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 might not be needed, or 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, 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 only use the factual information disclosed in the APA process for subsequent audits.

    Use of formal powers

    We aim for accountable 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 general practice to use EOI due to the mutual expectations discussed above in regard to transparency. However, there is nothing preventing us from an EOI if all other information gathering options have been exhausted.

    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.

    A risk hypothesis is used as a way 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:

    • understanding your tax governance framework
    • identifying tax risks flagged to the market
    • understanding significant and new transactions; and
    • 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 alignment of APA program with the Top 1,000 program further embraces the justified trust concept by seeking assurance of the economic activity which is not covered by the APA simultaneously.


    Delays may be cause if you are less cooperative

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

    Both parties must have mutual trust in order 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 APA’s (BAPA) with foreign jurisdictions. It can be used for unilateral APA’s (UAPA) depending on the circumstances. A discussion paper may also be used in BAPA’s to work through issues.


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

    End result of an APA is akin to a settlement. BAPA’s arrive at a mutual agreement under the relevant treaty and UAPA’s agree by virtue of the general power of administration.

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

    See also

    Types of APAs

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

    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 authorised to negotiate MAP 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, for the term of the APA, we accept the treatment you gave to the covered dealings.

    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: 15 Dec 2021QC 43088