Implementation of Advance Pricing Agreements: The Case for Low- and Lower-Middle-Income Countries

Advanced pricing agreements (APAs) aim to prevent transfer pricing (TP) disputes, increase certainty, and ultimately reduce the TP risk. This is achieved through taxpayers and tax authorities agreeing in advance on the criteria for determining the arm’s length pricing of transactions. These agreements are typically valid for several years, assuming that critical assumptions remain unchanged.

Interest in APAs has been steadily increasing, seemingly partly due to Action 14 of the Base Erosion and Profit Shifting (BEPS) project, which recommends the facilitation of effective dispute resolution mechanisms. This includes the use of Bilateral Advance Pricing Agreements (BAPAs) where feasible.

Many studies on APAs have largely focused on high-income countries – when they feature low- and lower-middle-income countries (LLMICs) it is mainly China and India. The challenges LLMICs face when enforcing TP legislation are different to those faced by high-income countries. This paper addresses this gap by presenting the findings of a study on four LLMICs – Indonesia and Vietnam, which have active APA programmes, and Nigeria and Uganda, which have APA provisions in their legislation but have yet to operationalise their regimes.

By examining the lived experience of these countries the study aims to interrogate the challenges faced, and provide recommendations for implementing APA regimes in LLMICs, which have not been as prominently featured in existing literature.

Based on interviews with various stakeholders in the case study countries, we reasonably conclude that a properly implemented APA regime can benefit LLMICs. It can increase tax certainty, and improve the relationship both between tax authorities and taxpayers, and tax authorities and treaty partners.

However, despite being beneficial, an APA regime should not be an automatic policy choice. A pragmatic approach should be taken, especially where a country’s TP regime is still in the early stages of implementation, or where, despite being present, the revenue authority has not built taxpayer confidence through consistent administration of TP regulations. Where a decision is made to implement an APA regime, investing in building the capacity of TP units plays a crucial role in developing and running a successful APA regime.