Put simply, APA (Advance Pricing Arrangement) is an agreement with the tax administrator on the price applied by your company in transactions with related parties. As long as the company adheres to the agreed price and conditions, the tax administrator cannot challenge the application of said agreed prices in transactions with relates parties. It is a method to introduce more certainty into the "troubled waters" of transfer pricing.
The amendment to the Income Tax Act taking effect from 1 January 2022 slashes the fee for issuing an APA by 50% for companies with a high tax reliability index. In the case of a unilateral APA (a unilateral APA represents an agreement between the company and the Slovak tax administrator) the relevant fee is reduced from EUR 10,000 to EUR 5,000 and in the case of a bilateral/multilateral APA (here, the company reaches an agreement with the Slovak and a foreign tax authorities), the fee is reduced from EUR 30,000 to EUR 15,000.
APA: A practical perspective
Issuing an APA decision is a complex and demanding process. APA refers to one type of selected transactions, such as the sale of products to the Group or the payment of license fees to the Group. The company is not entitled to a favourable APA issuing decision (i.e., the application may be rejected, or the issued decision may not be fully in line with the company’s expectations). This requires your company to attach even more importance to and deal responsibly with the process of collecting information, preparing of the documents itself, as well as collaboration with the tax administrator.
As part of the APA application, the company needs to submit a complete transfer pricing documentation. This documentation contains a large amount of information about the group, a detailed functional and risk analysis as well as a comparability analysis for the selected transaction.
The company may (but it does not have to) pre-discuss the information collected on the selected transaction with the tax administrator prior to the APA application. In this case, the entity conducts a discussion with the tax administrator about the potential application in a "friendly atmosphere". Open consultations are held on the selected transaction and the associated business relations of the company, while the tax administrator may make informal recommendations to the entity to eliminate any potential issues in the application.
As a downside of the above process, we see the possibility that the tax administrator shall require submission of detailed information about the company's business activities (e.g., estimates of future company development, detailed market analysis, detailed information on transfer pricing policy applied in the group of related parties, etc.). Such information goes well beyond the framework of data conventionally required in a tax audit. There is also a risk of opening a tax audit following the submission of an APA application, where the tax administrator does not comply with the APA application.
The question of whether to apply for a unilateral or bilateral APA is also important. Below, you may find a brief statistical overview of issued APA decisions in Slovakia. As one can see from the statistical data, unilateral APAs predominates in Slovakia.
Source: Advance Pricing Agreements (APA) statistics in the EU as at the end of 2019
From a practical point of view, a unilateral APA is only relevant if the company manages to agree with the Slovak tax administrator on lower taxation in Slovakia, so that higher taxation can be implemented abroad. If higher taxation were agreed in Slovakia and the foreign tax authority would not concede to the agreed taxation in Slovakia in any tax audit open in the future, this foreign tax authority would then apply higher taxation abroad, resulting in double taxation within the Group. The decision whether to select a unilateral or bilateral APA therefore depends on the specific circumstances of your company.
You will need to submit the application no later than 60 days before the start of the tax period during which the agreed APA should apply. In the event that the company wishes to have the APA for the tax period 2023 approved by the authorities, the application must be submitted no later than 1 November 2022.
APA may be issued for up to 5 tax periods, provided that the applicant company does not change the conditions under which the decision was issued. In this context, we would like to point out that the tax administrator continuously monitors the conditions throughout the 5-year period of validity of the issued APA decision. Equally, the tax administrator may consider the possibility of revoking or amending the APA decision, as long as it identifies any changes in the original conditions of the applicant company.
The APA approval process is not only time-consuming but also costly. On the other hand, the increased degree of legal certainty over a specified period of time and the reduced risk of double taxation (the case of a unilateral/bilateral APA) can prove to be a major benefit for your organisation.