Panacea for transfer pricing with APA framework only for MNC not for locals

The APA aims to mitigate risks related to audits and disputes while 

fostering cooperation between taxpayers and authorities

History of Advanced Pricing Framework

The concept of Advanced Pricing Agreements (APAs) originated in the late 20th century as a response to the growing complexities of international trade and transfer pricing disputes. Japan pioneered the framework in 1987, followed by the United States in 1991, introducing APAs as a tool to preemptively resolve tax disputes between multinational enterprises and tax authorities. Over the years, countries like Canada (1993), Australia (1991), and India (2012) adopted APA programs to provide certainty in transfer pricing, reduce litigation, and enhance global tax compliance. Today, APAs are a cornerstone of international tax frameworks, with over 50 countries implementing them to foster cooperation and trust in cross-border transactions

Sri Lankan introduction

The Inland Revenue Department (IRD) has unveiled its comprehensive Advanced Pricing Agreement (APA) Guide, a clear step towards fostering certainty, reducing tax disputes, and enhancing compliance in cross-border transactions. This initiative aligns Sri Lanka with global best practices in transfer pricing, providing businesses with a structured mechanism to ensure arm’s length pricing in international dealings.

What is an APA?

An Advanced Pricing Agreement is a formal agreement between a taxpayer and tax authorities, determining the method to establish the arm’s length price for specified international transactions over a fixed period. The APA framework includes three types:

1. Unilateral APA (UAPA): Between the taxpayer and the IRD.

2. Bilateral APA (BAPA): Between the IRD, the taxpayer, and a foreign tax authority under a Double Taxation Avoidance Agreement (DTA).

3. Multilateral APA (MAPA): Involves multiple foreign tax authorities in addition to the IRD.

The APA aims to mitigate risks related to audits and disputes while fostering cooperation between taxpayers and authorities.

Benefits for businesses

The APA program offers numerous advantages:

• Certainty: Pre-agreed pricing methods reduce potential disputes.
• Cost efficiency: Fewer audits and litigations lower operational costs.
• Transparency: Strengthens relationships between taxpayers and the IRD.
• Financial planning: Improved forecasting of tax liabilities.
• Global alignment: Enhances Sri Lanka’s reputation as a business-friendly jurisdiction.

Eligibility and process

Businesses engaged in cross-border transactions, particularly multinational enterprises (MNEs), are eligible to apply for an APA. The process consists of five key stages:

1. Pre-filing consultation: Informal discussions to assess the suitability of an APA.

2. Formal APA application: Submission of a detailed proposal, including the proposed transfer pricing methodology.

3. Evaluation and analysis: The IRD reviews the application and may request clarifications or conduct site visits.

4. Negotiation and agreement: Terms are finalised and formalised in an agreement.

5. Annual Compliance Report (ACR): Businesses submit annual reports ensuring adherence to the APA.

The entire process is designed to be collaborative, with the IRD aiming to complete agreements within 24 months.

Fee structure and compliance

The IRD has introduced a transparent fee structure, with a standard fee of Rs. 1,000,000 for unilateral APAs and Rs. 750,000 for renewals. For BAPAs and MAPAs, a direct cost recovery model applies. Compliance with the terms of the APA is monitored through annual reporting, ensuring businesses adhere to the agreed methods.

Strengthening Sri Lanka’s tax framework

This initiative reflects Sri Lanka’s commitment to enhancing its tax framework and aligning with international standards. By reducing disputes and promoting mutual trust, the APA framework is expected to attract foreign direct investments and boost the confidence of multinational enterprises operating in Sri Lanka. The full APA guide is available on the IRD’s website or by contacting the International Tax Affairs Unit.

Next logical step

The next logical step is to include local conglomerates into the APA framework, thereby supporting the purely Sri Lankan companies who face similar complexities and hardships in fulfilling Transfer Pricing Regulations. This will create certainty in the increasingly punitive world of Sri Lanka taxes, where interest and penalties can amount to as much or more than the tax payable. Fairness to MNCs are paramount, but we should not forget that it is Sri Lanka First and not Sri Lanka Last.