The Norwegian Tax Administration issues Guidelines on Advance Pricing Agreements (APA)

An Advance Pricing Arrangement (APA) is a written agreement that binds the tax authorities in the contracting states to accept a transfer price and/or pricing method for a specific future time period. It is therefore often called an advance pricing agreement (Nw: “forhåndsprisavtale“) in Norwegian.

An APA provides a guarantee that the tax authorities in the contracting states will accept the transfer price during the period covered by the APA. The APA therefore ensures predictability, and it can prevent double taxation and associated costly transfer pricing disputes. However, conducting APA processes is resource-intensive for the contracting states.

In 2023, Norwegian tax authorities had nine APA applications pending, of which four were resolved with an average processing time of just over 20 months. In 2023, there were 5,055 applications pending worldwide and 860 APAs were offered with an average processing time of 37 months. The Norwegian APA processing time is therefore almost half the time of that of the international average.

The basis for the APA scheme is constituted by provisions in the tax treaties based on Article 25 (3) first sentence of the OECD Model Tax Convention. Norwegian domestic law does not have a separate legal basis that regulates the framework for an APA – other than the incorporation of the tax treaties into Norwegian law.

A taxpayer may apply for the tax authorities to enter into an APA in order to clarify the price or margin to be used for transactions with associated parties, but it will vary how detailed the APA will regulate the pricing. In some cases, the agreement may set out a specific price, typically a margin applied on a variable basis. Moreover, the competent authorities may define only the pricing method, the basis of comparison or relevant pricing factors – without setting a specific price/margin or range. The competent authorities are given a considerable margin of discretion on this point.

Furthermore, for the agreement to be binding, certain terms and conditions may be stipulated. These conditions may, for example, be that there are no significant changes in the business activities, the agreement between the parties or in the tax rules in general. Typically, so-called “critical conditions” will be established, setting out requirements for the actual circumstances that must be met for the agreement to be binding on the tax authorities during the APA period. In the event of breach of the critical conditions, the consequence may be that the agreement lapses or must be renegotiated.   

An APA may be useful when one or more transactions are to be carried out between associated enterprises in different countries. It follows from the guidelines that an APA cannot be requested to clarify whether a company has a permanent establishment (Article 5). However, an APA may be requested for the allocation of profits to such a permanent establishment (Article 7).

An APA is normally valid for five years, but the duration will be determined on a case-by-case basis. In our experience, the Norwegian authorities generally negotiate on the basis of a five-year duration.

The tax treaties do not give taxpayers the right to demand an APA. It is up to the competent authorities of the countries involved to decide whether an APA should be entered into. However, under Article 25 (3), and in the same way as for a MAP, the treaty states have committed to endeavor to reach an agreement on how to apply the arm’s length price in cases where there is a certain amount of doubt.

Multilateral APAs are agreements that involve more than two states. A multilateral APA can either occur in the form of one agreement between several states, or in the form of two or more coordinated bilateral agreements. Multilateral APAs are useful when a company operates in many jurisdictions and wants to ensure a consistent approach to transfer pricing across all states involved. This can be particularly useful, for example, in cash pooling and cost contribution arrangements (CCAs) where there is typically a need for predictability in many jurisdictions. A disadvantage of multilateral APAs is that it can take longer to negotiate the agreement as there are several states that need to agree.

Bilateral APAs are agreements between two states.

Unilateral APAs are agreements between a company and a tax authority. Norwegian authorities do not process applications for unilateral APAs, but it is possible to clarify certain transfer pricing issues related to the application of Section 13-1 of the Norwegian Taxation Act through a binding advance ruling (“BFU”), see further details below.

A BFU, cf. Section 6-1 of the Tax Administration Act, can be compared to a unilateral APA in the sense that the tax authorities give the taxpayer a binding statement on the tax effects of a specific planned transaction before it is initiated. A BFU is binding on the tax authorities for five years after the end of the year in which the opinion was issued, while it is voluntary for the taxpayer to apply the tax authority’s assessment. Normally, most taxpayers will apply the assessment or refrain from carrying out the relevant transaction. As a starting point, an APA also has a duration of five years, but unlike a BFU, an APA can also have shorter or longer duration.

Unlike a BFU, which can deal with most tax law issues, the transfer pricing APA only deals with the application of the tax treaty to issues under Art. 7 or Art. 9.

It has occasionally been suggested, somewhat imprecisely in our view, that it is not possible to request a BFU on “transfer pricing” issues.

The BFU scheme is set out in Chapter 6 of the Tax Administration Act and the associated regulation. Pursuant to section 6-1-4, fifth paragraph of the Tax Administration Regulation, a BFU cannot address questions of “assessment of evidence, valuation or other discretionary assessments other than the actual application of the law”. Such valuation/pricing will normally be the key issue to clarify in an APA in the transfer pricing area. In practice, therefore, only bilateral/multilateral APAs are suitable for providing an advance opinion on specific prices/margins, price ranges or pricing methods.

In some transfer pricing cases, a BFU may nevertheless be requested for certain issues, typically to clarify whether Section 13-1 of the Taxation Act applies at all. Such clarification of the scope of application will typically apply to whether the conditions of associated parties or causality are met. It may also concern which transactions section 13-1 applies to, for example in equity transactions. Matters concerning which contracting party exercises control over the risk or is to be regarded as the owner for tax purposes at the time of allocation may also be the subject of a BFU. Furthermore, a BFU may be relevant in the event of a so-called structural adjustment, where such an adjustment is a necessary condition for establishing a reduction in income. These cases involve discretionary legal assessments – not quantity or valuation assessments pursuant to Section 6-1-4 of the Tax Administration Regulation.

The purpose of binding advance rulings is to provide predictability when clarifying discretionary legal assessments. This need for clarification applies just as much to legal clarifications in relation to Section 13-1 of the Taxation Act as for other areas of tax law where BFUs are issued on unclear legal issues. Any subsequent pricing may be based on the legal clarification that follows from a BFU.

10.1 What is ICAP?

ICAP (International Compliance Assurance Programme) is a voluntary compliance assurance program for multinational groups. Through ICAP, participating groups are given the opportunity for ongoing dialog with tax authorities from several countries where the group operates. ICAP is primarily aimed at issues related to transfer pricing (TP) and allocation to permanent establishments. However, other international topics may also be relevant. The Norwegian Tax Administration is a participant in ICAP, and a group with a Norwegian parent company can therefore contact the Norwegian tax authorities to initiate an ICAP process.

10.2 What is the result of ICAP and the connection with MAPs and APAs?
The compliance assurance in ICAP is carried out through a multinational mapping process between tax authorities based on submitted documentation and discussions. The result can be individual closure letters in which the authorities summarize their risk assessments and typically indicate whether the transactions in question are considered to entail low risk. However, ICAP does not provide legal certainty in the same way as an APA. This is because ICAP, unlike APAs, is not legally binding for the specific transactions. Nevertheless, the ICAP process can be less resource-intensive than APAs and MAPs. ICAP can therefore be an appropriate tool both on its own and in interaction with APAs or MAPs.

As a result, an APA or MAP is normally more relevant for specific transactions, while ICAP is used to get an overview of several transactions in a group.

The dialog with the tax authorities during ICAP does not exclude APAs or MAPs. On the contrary, taxpayers can identify low-risk transactions during the ICAP process, so that higher-risk transactions may be processed in an APA or MAP. In our view, ICAP can be considered as one of several tools in an overall strategy to manage tax risk in multinational situations.

The following tax subjects can apply for an APA:

• Companies domiciled in Norway that engage in controlled transactions with associated enterprises abroad.
• Companies domiciled in Norway interacting with their permanent establishment(-s) abroad.
• Companies domiciled abroad interacting with their permanent establishment in Norway.

However, organizations and other independent tax entities can also apply for an APA. An application for businesses assessed as partnership must be submitted by or on behalf of the partners. However, natural persons cannot request an APA, since they are not “associated enterprises” as set out in Art. 9

A lower and an upper limit must be set for when you can apply for an APA.

The lower limit must be drawn towards purely hypothetical transactions. Although cases of doubt may occur, if the transactions and contractual relationships have been planned, the lower threshold has been surpassed and we are dealing with more than purely hypothetical cases.

Although an APA may be able to cover existing contractual relationships and transactions, an upper limit must also be drawn. The latest point in time where you can apply for an APA for a particular income year is when the tax assessment for that year is reviewed by the tax authorities. In other words, an APA can be requested after the transaction has been initiated and thus later in time than for a BFU. A BFU can only be requested before the transaction is initiated. When the tax assessment is subject to change, a MAP may be the relevant option instead.

A further restriction applies in cases where an APA application concerns matters that are covered by, or may be affected by, a notified or initiated audit for previous years. In such cases, the tax authorities will normally not initiate an APA process before the tax office has completed the audit, with the exception of special cases where an efficient tax process indicate that the process should nevertheless be initiated.

An application for an APA thus does not preclude the tax authorities’ right to continue or finalise cases that have been admitted for control. Also, a completed APA process does not prevent the tax office from controlling the company’s tax assessment, including that conditions and prerequisites that follow from the APA are met, and that the company has provided correct and complete information during the APA process.

12.1 APA can be given effect also for previous years – “Roll back”

An application can be made for the APA to cover previous income years (“roll back”). This is relevant where the facts and circumstances are materially the same for previous income years as for future income years. The tax authorities may also make it a condition for entering into an APA that previous income years be included – if the interests of efficient tax administration so dictate. When assessing whether one should apply for an APA prior to a transaction, one should therefore consider whether it is desirable to ask for a “roll back”, as well as taking into account the fact that application to previous income years can be imposed.

As a general rule, the Norwegian tax authorities do not grant a roll back more than three years back in time.

12.2 APA renewal

It is possible to apply for renewal of an APA, and it is recommended to apply in good time before the agreement period expires. The APA renewal process is often straightforward, and it is our experience that renewals can be carried out fairly quickly.

12.3 Relation to the Mutal Agreement Procedure (MAP)

A taxpayer may request a MAP under Art. 25(1) if one or both of the contracting states has taken a measure that results or will result in taxation that is not in accordance with the tax treaty. A measure can typically be a notice of reassessment of the reported taxes or decision to reassess the tax reporting. In the same way as the APA, a MAP may apply to transfer pricing between associated enterprises and the attribution of profits to a permanent establishment. The taxpayer can request a MAP at the earliest when the measure will result in such taxation. Since a MAP under Art. 25 (1) can apply to later income years – roll forward – and an APA can apply to earlier income years – roll back – there may be a gradual transition.

13.1 Prior to the submission of an application

Before submitting an APA application, consideration should be given to whether it is appropriate for the transaction in question. The APA process can take between 20 and 36 months, so this should be considered early in the preparation of the transaction.

At this stage, it must be assessed whether the transaction and the taxpayer meet the conditions described above. Necessary documentation and analysis of the business, the market and the transaction must also be obtained. The assessment of the application will emphasize the risk of double taxation, whether there is actual doubt as to how the arm’s length principle should be applied, and whether the complexity and size of the transaction indicate the need for an APA. This will normally be mapped in a preliminary meeting.

13.1.1 Preliminary meeting

The guidelines state that it is both recommended and may be required that the applicant attend a preliminary meeting before the application is submitted. The purpose of the meeting is to provide the tax authorities with sufficient information to assess whether the matter is suitable for an APA. The following elements should be prepared for the meeting:

• Whether the case is suitable for an APA.
• Which transactions the APA should cover.
• The duration of the APA period, including the use of “roll back”.
• Special issues and the choice of transfer pricing method.
• What information the application must contain.
• The process and its expected timeline.

13.2 During the application process

Once the APA application has been submitted, the tax authorities will consider whether to initiate an APA process with the competent authorities in the other jurisdiction. This is assessed on a case-by-case basis, and it is not given that an application leads to the Norwegian tax authorities initiating negotiations.

In the assessment of whether the APA process should be initiated, emphasis is placed on the following factors, among others:

• The risk of double taxation if an APA is not entered into.
• The extent to which there is actual doubt about how the arm’s length principle should be applied.
• Whether the case is suitable for an APA process and whether conducting an APA process involves appropriate use of public resources.
• The size and complexity of the transaction can be emphasized, but there are no minimum requirements.

Both/all relevant countries will review the APA application, exchange views and discuss the transfer pricing method and terms. If the authorities in both/all countries agree, the taxpayer will be presented with the negotiated APA to decide whether the taxpayer wishes to accept it.

During the process, the applicant will be kept informed of the status and may be asked to map factual aspects to both/all of the contracting states involved. The additional information must be provided within a reasonable period of time, and the same information must be provided to all contracting states. The applicant is obliged to disclose all matters that may be of significance to the case, and to provide sufficient information for the application to be processed properly. What constitutes sufficient information will vary depending on the nature of the business and the complexity and scope of the transaction. If these obligations are not met, the authorities may choose to terminate the process.

There are no case processing time requirements for APAs, and the case processing time may therefore vary depending on the complexity and scope of the case. However, the ambition is for bilateral APAs to be finalized within 24-30 months after the complete application has been received by both countries.

During the proposed APA period, the tax base will be determined in accordance with the content of the APA application.

13.3 Compliance with the APA

Once the contracting states have agreed on an APA, the applicant will be presented with the APA and given a deadline of four weeks to accept it. If it is not accepted, it will not take effect in any of the states and the application must be withdrawn.

It might be necessary to make certain changes to the tax assessment for one or more income years in order to be coherent with the content of the APA. The authorities will inform the tax office, but the applicant will also be informed of the necessary changes.

13.3.1 Compliance report

An APA agreement will include a condition that an annual compliance report must be submitted. The report must document that a tax return has been submitted in accordance with the agreement and that the terms and conditions of the agreement have been complied with. This includes documenting that the pricing method agreed in the APA has been followed and that the critical conditions have been met. The compliance report must be submitted as an attachment to the tax return. In addition, the taxpayer is obliged to disclose any circumstances that imply that the critical conditions in the agreement are not met, or that the agreement is not complied with. The information must be provided in the annual compliance report at the latest.

If incomplete or incorrect information is provided in connection with the APA application or during the compliance period, this may result in the APA agreement being terminated, possibly with retroactive effect. If the APA is terminated, it may result in the tax assessment being changed for the relevant years, and a reassessment case brought as a result of information failure may result in a sanction in the form of penalty tax.

In our experience, both simple and more complex transfer pricing cases may be suitable for APAs. When applying, it is crucial to establish a thorough functional and comparability analysis. A structured and thorough transfer pricing documentation including detailing the actual transactions, would normally provide a good starting point for an APA application.

Although distribution cases dominate internationally, Norwegian advance pricing agreements show a varied picture. Some APAs in recent years are very extensive and involve very large amounts. In light of the fact that the APA process is not further regulated by law, and has become increasingly important in recent years, the guidelines from the Norwegian Tax Administration and competent authority are very welcome.