While some taxpayers may face challenges in applying their advance pricing agreements (“APAs”) with the tax authorities under the economic conditions resulting from the pandemic, all existing APAs and their terms should be respected unless a critical assumption is breached. This article provides an overview of how COVID-19 affects APAs in the light of the OECD’s “Guidance on the transfer pricing implications of the COVID-19 pandemic.”
The COVID-19 pandemic and the governments’ response have dramatically transformed the economic conditions. As a result, taxpayers affected by the pandemic may face challenges in applying their APAs for 2020. Whether the validity of an APA can be challenged will be determined according to critical assumptions it defines. Under Latvian legislation an APA defines its critical assumptions and the circumstances in which it should be amended, as well as conditions that will make it invalid. It is important to note that a mere change in the taxpayer’s business performance for 2020 will not result in a critical assumption being breached.
The first step in assessing the impact of COVID-19 on the validity of an APA is to review its terms carefully. Whether a critical assumption has been breached should be analysed on a case-by-case basis. If there is a risk of breach, the taxpayer has a right to seek the tax authority’s approval for amending the APA.
Breaching a critical assumption can have the outcomes set out below.
1. Revision. The taxpayer and the tax authority can agree to revise the APA following a material change to the underlying conditions. In some cases it might be reasonable to keep some of the terms and to revise any provisions or transactions directly affected by the breach.
The OECD Guidance suggests considering these options for revision:
2. Cancellation. The APA is treated as valid up to the date of cancellation. This option is appropriate (i) if there has been a material breach of any of the critical assumptions, or (ii) if the taxpayer substantially fails to comply with any term or condition of the APA. Cancellation is not automatic, though, and the tax authority may waive it under certain circumstances.
3. Revocation. The taxpayer is treated as if the APA was never entered into. Revocation is appropriate (i) if there is an error or omission attributable to the taxpayer’s inadvertent or wilful failure when filing the APA request, or (ii) if the taxpayer fails to comply with a material condition of the APA. The pandemic has not changed the standard revocation rules, so APA revocations should be limited (just like those arising in any other circumstances).
Early notification is encouraged to give the parties more time to come to an agreement on revising the APA. Where critical assumptions are breached, it is important for the taxpayer to provide the tax authority with relevant supporting documents, for example:
As for APA processes initiated during the pandemic, the parties are encouraged to take a flexible and collaborative approach. Examples of considerations include: (i) separating an APA for the period affected by COVID-19 from one covering the post-COVID period; (ii) adding a condition that the relevant effects of the pandemic should be analysed and reported annually once they are known and making retrospective amendments to the APA; (iii) extending the APA period to mitigate the short-term effect of the pandemic; (iv) using a cumulative or term test throughout the APA period.
If you have any comments on this article please email them to lv_mindlink@pwc.com
Ask questionAs we carry on exploring the OECD’s Guidance on the transfer pricing implications of the Covid-19 pandemic (the “Guidance”) this article offers an overview of how government assistance programmes affect transfer pricing analysis.
The unique economic conditions arising from Covid-19 and national restrictions have caused certain difficulties in applying the arm’s length principle for transfer pricing analysis. To pick up where we left off in our article Covid-19: transfer pricing impact, this one explores Guidance on the transfer pricing implications of Covid-19 the OECD published in late 2020.
We use cookies to make our site work well for you and so we can continually improve it. The cookies that keep the site functioning are always on. We use analytics and marketing cookies to help us understand what content is of most interest and to personalise your user experience.
It’s your choice to accept these or not. You can either click the 'I accept all’ button below or use the switches to choose and save your choices.
For detailed information on how we use cookies and other tracking technologies, please visit our cookies information page.
These cookies are necessary for the website to operate. Our website cannot function without these cookies and they can only be disabled by changing your browser preferences.
These cookies allow us to measure and report on website activity by tracking page visits, visitor locations and how visitors move around the site. The information collected does not directly identify visitors. We drop these cookies and use Adobe to help us analyse the data.
These cookies help us provide you with personalised and relevant services or advertising, and track the effectiveness of our digital marketing activities.