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UK’s bilateral APA program for financial transactions is in line with growing global approach

Executive summary

The United Kingdom (UK) Tax Authority (HMRC) has indicated that it intends to start a program of bilateral Advance Pricing Agreements (APAs) for financial transactions and finance companies and is inviting immediate ”expressions of interest; from UK taxpayers who may see value in entering into bilateral or multilateral APAs in relation to their financing arrangements.”

HMRC has linked its decision to offer bilateral APAs in appropriate cases to a number of factors including the increasing recognition based on recent discussions at the Organisation for Economic Co-operation and Development (OECD) that many financial transactions are complex and difficult to price and that there is a lack of consensus between tax authorities on many aspects of transfer pricing in this area. It sees a program of bilateral APAs as a way to provide greater and earlier certainty to taxpayers in line with one of the key objectives of the OECD’s Base Erosion and Profit Shifting (BEPS) project.

It is understood that many of the UK’s tax treaty partners, including the Australian Taxation Office (ATO), are also interested in entering into bilateral APAs for financial transactions and that HMRC is already discussing financial transactions as part of APA negotiations with a number of other tax authorities.

Detailed discussion


There has recently been an unprecedented increase in challenges from tax authorities regarding the transfer pricing of financial transactions, including intercompany loans, cash pools, and guarantee fee arrangements, as well as the role of group treasury companies. However, as was evident in the recent ”non-consensus” Discussion Draft on BEPS Actions 8-10: Financial Transactions, there is a lack of consensus between tax authorities on almost all of the key areas; thus the tax audit environment is very challenging.

The Chevron case1 in Australia is the most notable recent case law decision in this area and in its wake the ATO has published new guidance on its risk assessment processes for intercompany loans.2 The Chevron case emphasized the importance of reviewing the intercompany loan arrangements on a holistic basis in determining arm’s-length interest rates. In this regard, consideration should be given not just to the arm’s-length interest rate, but also to the terms and conditions of the intercompany loan (including examination of the intercompany loan e.g., security, seniority, guarantees). This includes whether the financing has comparable terms to any other internal or external financing of the taxpayer, and if not whether the variances can be explained commercially.

The ATO has also launched a systematic program of review of the pricing of intercompany loans having an Australian counterparty.3 There are cases in a number of other jurisdictions which are known to be going to or already in litigation in this area. A concern for multinationals is the increased potential for uncertainty as countries are implementing new rules at different times and are taking different positions. Similarly, tax authorities are concerned that different approaches taken by their treaty partners could lead to a problematic backlog of cases in the mutual agreement procedure (MAP).

Accordingly, there is a growing recognition among tax authorities that cooperative compliance, particularly the use of APAs, is the way forward, particularly in respect of large and/or complex financial transactions. HMRC’s initiative to start a program of bilateral APAs for financial transactions and finance companies is a prime example of the increasing focus on cooperative compliance.

APA developments

An APA allows the taxpayer and a tax authority (or more than one tax authority) to enter into a prospective agreement, generally covering at least five tax years, regarding the taxpayer’s transfer prices. In principle, taxpayers may enter into APAs with more than one tax authority – i.e., bilateral or multilateral APAs – through specific statutory programs or on occasion using the MAP included in most double taxation treaties. Increasing numbers of countries have or are planning to have APA programs.

The complexity of transactions and the lack of consensus across different jurisdictions in the approach to the transfer pricing of financial transactions, including the pricing of intercompany loans, thin capitalization and the appropriate characterization of group treasury companies, has increased the attractiveness of bilateral APAs.

Expanding the APA program to include relevant financial transactions is a positive development, but will require additional competent authority resources (and possibly increased flexibility from tax authorities). To manage this, criteria relating to size and complexity are likely to apply.


Bilateral APAs covering financial transactions may be of particular interest for multinational groups where:

  • Their financial transactions are large and/or complex.
  • The group is already under challenge or audit on the transfer pricing of financial transactions, perhaps in more than one jurisdiction.
  • The potential double tax at stake is significant and the MAP process may be seen as not able to give the prospective certainty required.
  • The group has a preference for managing its large transfer pricing risks on a proactive basis.

As a result of an APA, a group will obtain tax certainty in respect of the pricing of the covered transactions typically for a period of around five years, which will mean there will be a much reduced risk of tax audits during that time. This could include certainty relating to thin capitalization where both territories see this as properly dealt with under Article 9, which is the position of the UK. As well as helping with the control of tax compliance risk, bilateral APAs can be beneficial from an accounting perspective and in the context of any proposed sale of the included entities.

A bilateral APA would then sit alongside other aspects of the design, implementation, documentation, and defense of a group’s intra-group financial transactions.

These could include:

  • Setting up global loan pricing and guarantee fee pricing models
  • Reviewing on a regular basis the group’s global transfer pricing documentation services
  • Negotiation of bilateral APAs for non-financial transactions
  • Defense of an organization’s position in tax audits including via negotiation, mediation, the MAP and Joint Tax Audits


1. Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62.

2. ATO’s Practical Compliance Guideline (“PCG”) 2017/4; ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions.

3. Including the ATO’s recently launched Top 1000 Streamlined Assurance Review program.


EYG no. 011500-18Gbl

Download this Tax Alert as a PDF file.

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