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Advance Pricing Agreement

This guidance will be updated.

An Advance Pricing Agreement or an Advance Pricing Arrangement (APA) is an agreement agreed on between at least two states that are party to a tax treaty. The advance pricing agreements are negotiated by competent authorities of each of the countries involved.

What is an APA?

An advance pricing agreement is an agreement between state parties to a tax treaty. It is intended for situations where it is necessary to resolve transfer pricing matters open to interpretation related to intra-group transactions in a group with international operations.

How can an APA benefit a taxpayer?

An advance pricing agreement provides a taxpayer advance certainty of how the pricing of the transactions within the scope of the APA is treated in income taxation if the taxpayer acts in accordance with the APA. At the same time, the taxpayer can also avoid international double taxation in connection with the pricing of these transactions since all state parties to the APA commit to accept transfer pricing being in accordance with the APA.

An APA provides an instrument for preventing disputes on transfer pricing. Experiences of taxpayers and tax authorities of the advance pricing agreements have shown that the best way to resolve complex transfer pricing issues for all parties is to work together before the issue becomes a problem. Seeking a solution afterwards is usually more difficult.

Advance rulings issued by the Finnish Tax Administration or the Central Tax Board do not eliminate the risk of international double taxation. The issue of how a transaction conducted by related parties will be treated in taxation of the other party is always left open in these rulings. On the other hand, the negotiation process on an APA between two or more states may be lengthy and will not necessarily lead to an agreement.

Basis of an APA

There is no separate legislation regarding APA in Finland. Finland can conclude an advance pricing agreement with states with which it has a tax treaty (a treaty for the avoidance of double taxation with respect to taxes on income and capital gains). An APA is based on the mutual agreement procedure laid down in the tax treaties between Finland and other states under which international double taxation can be eliminated between the state parties to the treaty. The mutual agreement procedure is based on Article 25 of the Model Tax Convention published by the OECD (Organisation for Economic Co-operation and Development).

The legislation and procedures regarding APA vary between the states that are parties to tax treaties. In these guidelines, the APA procedure is only discussed from the Finnish perspective and therefore taxpayer should also examine the details of the APA procedures applied by the other state parties such as deadlines for submitting applications and requirement concerning the content.

Which parties can conclude an APA?

An APA is an agreement negotiated by competent authorities. “Competent authority” means the Ministry of Finance or a representative authorised by the ministry. In Finland, the Finnish Tax Administration is the competent authority when, under a tax treaty, a representative or an authority authorised or designated by the Ministry of Finance may serve as the competent authority.

Therefore, matters concerning advance pricing agreements are primarily resolved by the Finnish Tax Administration. The Ministry of Finance may, however, decide to resolve important matters of principle. In the Finnish Tax Administration, the tasks of the competent authority relating advance pricing agreements are handled by the transfer pricing operations.

Matters covered by an APA

An APA can be conducted on the pricing of transactions between related parties that have different countries of residence. All the parties applying for an APA must have a state party to a tax treaty as their country of residence.

An advance pricing agreement can only be concluded if the settlement in the agreement is in accordance with the arm's length principle. This means that under the solution reached in the APA negotiations, Finland must be entitled to an arm's length-based proportion of the tax revenue that is generated by the transactions referred to in the agreement.

Recommendations for an APA issued by the EU

On 26 February 2007, the European Commission submitted an announcement to the Council, the European Parliament and the European Economic and Social Committee on the work of the EU Joint Transfer Pricing Forum in the field of dispute avoidance and resolution procedures and on Guidelines for Advance Pricing Agreements (COM (2007) 71/final; hereafter “EU recommendations”). The EU recommendations are based on the best practices identified by the Joint Transfer Pricing Forum (JTPF) of the European Union. In the EU recommendations, there are references to Article 25.3 of the OECD Model Tax Convention, which is considered to form a basis for APAs.

Read more about EU recommendations (Joint Transfer Pricing Forum).

OECD guidelines on APA

The OECD has issued guidelines on the APA procedure as part of its transfer pricing guidelines (see OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2010, Chapter IV, Section F and the Annex to Chapter IV). Under the transfer pricing guidelines issued by the OECD, negotiations on an APA are based on Article 25 of the OECD Model Tax Convention.

Read more about APA (

Before submitting an APA application

APA negotiations require substantial inputs from the taxpayers and the competent authorities. Therefore, the APA procedure is mainly suited for situations where the parties must agree on substantial transfer pricing matters that are open to interpretation. Before submitting an APA application, the taxpayer should conduct preliminary discussions with the competent authority on whether the APA procedure is suitable for the taxpayer's transfer pricing matter. The purpose of the preliminary discussions is to select the most suitable procedure for each case.

After the preliminary discussions, the parties may meet again and discuss the essential matters regarding the application, assess the content of the application to be compiled and which kind of evidence is required to enable for resolving the matter (pre-filing meeting). Under the EU recommendations and OECD guidelines, the meeting typically precedes the submitting of the application.

The meeting can be more productive if, before the meeting, the taxpayer presents to the competent authority the transfer pricing issue it intends to include in the application, the targeted scope of the APA and all other relevant matters required for resolving the matter. It is recommendable for the taxpayer to also contact the competent authorities of the other state parties that may be included in the APA to clarify the prerequisites for the APA.

An APA gets started from the application submitted by the taxpayer

The advance pricing agreement is always conducted at a taxpayer's initiative. The APA procedure starts with the taxpayer's written application submitted to the competent authority. There is no standard format for the application in Finland, yet the taxpayer should verify with the competent authorities of the other states the requirements laid down in those countries for the APA application (such as deadlines for submitting the application, requirements concerning its content). The APA procedure is normally conducted in English and therefore the APA application is recommended to be compiled in English.

The APA application must be submitted separately for each of the state parties to the tax treaty if the transactions covered by the APA concern related companies located in more than one state party. The application must be submitted to Finland and to all other state parties concerned. In order to ensure an efficient APA procedure, the application and the information supplementing it should be submitted simultaneously and with identical content to all competent authorities involved.

The APA application is recommended to be compiled in as early stage as possible. The time required for processing the application should also be considered. Under the EU recommendations, the application should be processed within 18 months. In practice, the processing periods are considerably longer. This observation is based on EU statistics (which also contain unilateral APAs issued by individual states and advance rulings). The tax years covered by the APA are separately specified in the APA between the competent authorities.

As a rule, the taxpayer may decide which related-party transactions are included in its APA application. The application should, however, concern a specific transaction that can be assessed separately from other transactions. If a transaction related to a broader arrangement is not included in the APA application, it is considered that the taxpayer has provided inadequate and misleading information. In such case, the APA would not be binding on Finland.

The required content of the application

In the taxpayer's application must be presented all the information required in order to resolve the matter. The content of the information required varies case by case. For guidance on the content of the information, see the EU recommendations and the OECD Transfer Pricing Guidelines. In the application the taxpayer should describe how the selected transfer pricing method indicates that the future transactions are priced at arm's length.

The application should include among other things

  • functional analysis
  • critical assumptions
  • details of the proposed transfer pricing method
  • economical information
  • the agreements related to the transactions concerned in the application.

“Critical assumption” means a fact or a circumstance that must actualize for an APA solution to be in accordance with the arm's length principle. Critical assumptions may concern for example the following matters:

  • national legislation
  • terms and conditions of the tax treaties
  • import restrictions
  • economic conditions
  • market shares
  • exchange rates
  • interest rates
  • credit rating
  • capital structure

Parties to the APA and communication with the taxpayer

The advance pricing agreement is conducted between states and the taxpayer is not a party to the agreement. Competent authorities of the states involved are the parties to the negotiations on the APA procedure.

The taxpayer may be requested to submit additional information required for resolving the matter and the taxpayer may also submit such information spontaneously. The additional information should be submitted simultaneously to all state parties to the tax treaty that are involved in the APA and the content of the information should be identical. During the process, the competent authority may provide the taxpayer with information on such matters as the progress of the negotiations and other essential matters related to the processing.

Which matters can be agreed on in an APA?

The basic purpose of an APA is not to determine an exact monetary value to the transactions concerned in the application. An APA sets out the criteria under which the transactions made between related parties are priced in accordance with the arm's length principle. The following are some of the issues that can be agreed on in an APA:

  • transfer pricing method
  • comparables
  • possible adjustments concerning the comparability of the comparables
  • critical assumptions anticipating the impact of future events.

Competent authorities agree on the period of validity of the APA. An APA is made for a set period of time and its legal effects extend only to the APA's period of validity. The period of validity varies on a case-by-case basis and depends for example on such factors as the type of the transactions concerned and the line of business.

The competent authority notifies the taxpayer of the result of the negotiations

The competent authority notifies the taxpayer of the result of the negotiations. Many states require that the taxpayer approves the agreement before it becomes binding.

The competent authorities do not always reach an agreement. Under the articles on mutual agreement procedure contained in the tax treaties between Finland and other countries, the competent authorities must only endeavour to reach an agreement on the matter. Should the competent authorities fail to reach an agreement, the competent authority will notify the taxpayer also of the failure.

The taxpayer may withdraw the APA application during the processing

The taxpayer may withdraw its application at any time during the processing of the APA application. The withdrawal must be made in writing. In such case, the competent authority will notify the taxpayer of the termination of the processing. The taxpayer may decide to withdraw its application, for instance, if the competent authority has notified the taxpayer during the application processing that the competent authorities assess the application of the arm's length principle in a manner that differs from what is presented in the application.

An APA is binding on the Finnish Tax Administration

An APA is a tax authority's resolution of a particular transfer pricing matter of a particular taxpayer for a particular period of time. The APA is binding on the Finnish Tax Administration for the period of its validity if the taxpayer follows the terms and conditions of the APA for the period of its validity and the critical assumptions contained in the agreement will actualize. It is also required that the taxpayer has provided truthful information and that the legal provisions on which the APA is based have not changed.

Taxpayer's notification to the competent authority

The competent authorities may agree that the taxpayer is obliged to submit a notification under the APA. The taxpayer may, for example, be required to submit an annual notification to the competent authority on its compliance with the valid APA. This obligation for submitting a notification is not connected with the obligation to file tax returns or the transfer pricing documentation obligation as it concerns separate notification to the competent authority. The obligation to submit the notification is among the terms and conditions of the APA. When notifying the taxpayer of the result of the negotiations, the competent authority also notifies the taxpayer of the matters on which the notification must be submitted and the deadlines for that.

The aim is to set the reporting deadlines in a flexible manner. The reporting deadlines may for example be in accordance with the practice observed in the other state party to the tax treaty in order to minimize the administrative burden arising from the reporting. The aim is also to consider the case-specific issues in the requirements concerning the content of the notification. The aim is to keep the content of the notification obligation as easy as possible. The taxpayers are not normally required to submit extensive analyses or collect large amounts of information for the notification.

An APA can be renewed or revised

The taxpayer may submit an application for renewing the APA to the competent authority. The APA is agreed on for a particular period of time, which means that there is no certainty of the tax treatment of the concerned transaction after the agreement period. The taxpayer is advised to submit the new application early in order for the APA to be renewed before the original APA expires or at least as soon as possible after its expiry. When the transactions covered by the original agreement are assessed, renewing the APA may be a faster and easier procedure than the processing of the original APA application.

The APA is not binding on the Finnish Tax Administration if the actual conditions do not correspond to what was presented in the application. The taxpayer should submit the application for revising the APA as soon as the circumstances change.

Page last updated 1/1/2022