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APA in Portugal

Patrícia Matos, Deloitte, Portugal

The Deloitte Portugal transfer pricing practice is led by Patrícia Matos and consists of 27 transfer pricings specialists, located in three offices: Lisbon, Oporto and Luanda (Angola) – the largest fully dedicated transfer pricing team operating in Portugal.

The Deloitte Portuguese transfer pricing team has worked closely with the Portuguese tax authorities' transfer pricing team on several technical issues and has been involved in the critical analysis of updates to the Portuguese Transfer Pricing Legislation. In fact, assisted in the setup of the first APA ever signed by the Portuguese tax authorities, and have already supported the signature of other 12 APAs in Portugal.

APAs have been available in Portugal since 2008 and both unilateral and multilateral APAs are available as an option for the taxpayers, although, until 2014, the possibility for the taxpayers to opt for a unilateral APA was limited by the drafting of the 2008 APA rule.

The 2008 rule stated that whenever some of the transactions included in the proposed scope of the APA involved transactions with taxpayers located in countries with whom Portugal had signed double taxation conventions/treaties/agreements, then the APA request needed to be multilateral. In 2014, this was changed to allow the taxpayer to present for the tax authorities' approbation the agreement proposal of his choice, whether unilateral or multilateral.

As the Portuguese transfer pricing rules apply to both domestic and international transactions, APAs can be requested for both type of transactions.

Every APA request will be considered on the basis of its particular facts and features. The Portuguese Tax Authorities seem to encourage the setting-up of APA in the following situations:

  • the transfer pricing issues at stake are complex rather than straightforward, meaning that there is doubt or uncertainty about how the arm's length principle should be applied or about the arm's length future level of remuneration; or
  • the industry of the proposing taxpayer is relevant in terms of tax revenue for the tax authorities, or in terms of employment for the region/country, and the industry trend is driving towards relocation of that industry to other jurisdictions, which will imply that the Tax Authorities will seek to mitigate long term uncertainties regarding the continuance of the taxpayer presence and the level of employment and tax revenue that can be generated in the future; or
  • the taxpayer seeks to implement a method which is highly tailored to its own particular circumstances.

There are no fixed criteria, such as turnover or level of debt restricting acceptance of APA applications, but the process is designed to help resolve complex transfer pricing issues (where the arm's length provision is a matter of doubt) which have a significant commercial impact on the enterprise's results and on the subsequent tax revenue.

The signing of the APA implies the payment of a fee to the Tax Authorities that vary according to the scale of the taxpayer's turnover.

The process for obtaining an APA is explained in the Ministerial Order 620-A/2008, of July 16, and must start with the submission of a preliminary request which should generally cover the following:

  • the nature of the transfer pricing issues intended to be covered by the APA;
  • a presentation of the transactions included in the scope of the APA and of the entities involved in those transactions; and
  • a generic description of the proposed transfer pricing method.

The Tax Authorities then have 60 days to answer to the preliminary request. Usually the Tax Authorities only provide an answer in that timeframe to reject some requests; those which they do not answer are automatically approved to proceed to the following phase, which is the application of a formal APA proposal by the taxpayer. That implicit approval means that they are willing to consider the APA proposal but does not imply any commitment of a future acceptance of the APA to be proposed.

The formal application of the APA proposal may be submitted until 180 days before the beginning of the first tax exercise to be included in the APA.

A "typical average timeline" to reach agreement on a unilateral APA has been around 12 months. For multilateral APAs, the initial agreement with the Portuguese Tax Authorities has required around 15 months, although the agreement of the other Tax Authorities involved has required much more time to obtain and most of them have not been concluded yet.

Additionally, the Ministerial Order 620-A/2008 sets out the information to be included in the formal APA application and its format, as follows:

  • the identification of the parties involved in the APA and the characterization of the type of special relationship existing between those parties;
  • a description of the activities developed by each party intervening in the transactions included in the scope of the APA;
  • a description of the categories of transaction flows to whom the APA is intended to apply, including the presentation of the transfer pricing issues proposed to be covered by the APA;
  • the selection of the transfer pricing method to be applied to determine the pricing of the transactions and the reasons underlying that selection;
  • the identification of any database or other external source of information used to support the proposal;
  • the identification of the internal or external comparables used and of the justification underlying their selection, as well as of potential comparability adjustments performed;
  • presentation of the application of the method and of the subsequent results;
  • indication of profit sharing between the participants as a result of the transfer pricing method suggested;
  • indication of the proposed periods to be covered by the APA;
  • a description of any (current or in negotiation) tax enquiries, competent authority claims or any agreement with other tax authorities;
  • identification of all related transactions conducted by any of the parties and excluded from the scope of the proposed APA, also making reference to the counterparties of those transactions;
  • in the case of a bilateral/multilateral APA, identification of the tax administrations of the non-resident parties that participate in the transactions of the proposed APA, and confirmation that a simultaneous agreement proposal has been submitted to those tax administrations; in the case of a unilateral agreement, reasons that have led the taxpayer to opt for a unilateral agreement;
  • declaration of commitment by the parties that they will comply with the legal duty to cooperate with the Tax Administration, namely to provide all necessary information or documentation, including the authorization to access any database used to which the Tax Administration may not have access;

Documents that should be delivered as an appendix to the proposal, according to Ministerial Order 620-A/2008:

  • a description of the worldwide organisational structure, ownership and business operations of the group to which the parties in question belong, the place or places where such operations are conducted;
  • an industry/sector/market analysis;
  • a description of the trading strategy of the business/company/group for the period covered by the APA, indicating any changes relative to the strategy of previous years;
  • an analysis of the functions and risks of the parties participating in the transactions included in the scope of the APA;
  • the identification of assumptions made in developing the proposed transfer pricing method which are critical to the reliability of its application under the arm's length standard;
  • recent accounts of the parties for the previous three years;
  • copies of contracts/agreements and other relevant documents signed between the proposing taxpayer and its related parties that may impact the operations included in the scope of the APA, and indication of any similar agreements signed with independent third parties; and
  • in case of a unilateral agreement, a waiver of rights regarding correlative adjustments due to transfer pricing adjustments performed by other tax administrations on the issue at stake in the proposed APA.

Ministerial Order 620-A/2008 states that the maximum duration of an APA is three years, but it may be extended for similar periods if requested six months prior to the term. In those cases, the renovation process should follow the same procedures as the initial proposal.

The Portuguese rule does not allow any "roll-back" or retrospective application of the APA to earlier periods. The initial date of application of an APA needs to be at least 180 days older than the date of submission of the formal APA proposal by the taxpayer. Nevertheless, there are cases where the Tax Authorities have informally accepted that the taxpayer may apply the same method agreed within the APA to exercises that are previous to the APA's initial date.

In case of a unilateral agreement, where there is an appropriate Double Taxation Agreement in place, and the Tax Administration considers that a bilateral APA would be more appropriate, they may communicate with the other administration to ascertain whether that administration would consider entering into a bilateral APA process. However, there is no obligation stipulated in the law for the Portuguese Tax Administration to inform other tax administration of any unilateral Portuguese APA and of the agreed terms.