Why the Master File Asks Only for Unilateral APAs

The OECD's transfer pricing documentation annexes split advance pricing arrangements between the master file and the local file in a way that looks arbitrary until you see what each document is for. The master file asks for a list of the group's unilateral APAs. The local file asks for copies of APAs the local jurisdiction is not a party to. Those are not two versions of the same requirement, and getting the distinction wrong means filing the wrong thing in the wrong place.

What an APA is, in the Guidelines' own terms

Paragraph 4.134 of the OECD Transfer Pricing Guidelines, in the January 2022 edition, defines an advance pricing arrangement as an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time. The criteria it names are method, comparables and appropriate adjustments to them, and critical assumptions as to future events.

The same paragraph adds three things worth carrying. An APA is formally initiated by the taxpayer. It requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax administrations. And APAs supplement rather than replace the traditional administrative, judicial and treaty mechanisms, being most useful where those fail or are difficult to apply.

There is a scope caution at paragraph 4.135: great care must be taken if an APA goes beyond the methodology, the way it will be applied, and the critical assumptions, because more specific conclusions rely on predictions about future events. Paragraph 4.139 is blunter still, stating that unreliable predictions should not be included in APAs.

One definitional trap. The Guidelines' glossary says an APA may be unilateral, involving one tax administration and a taxpayer, or multilateral, involving two or more tax administrations. It does not use the word bilateral at all. Chapter IV then consistently distinguishes bilateral from multilateral. So if you quote the glossary definition, do not also claim the Guidelines define multilateral as more than two parties, because the glossary says two or more.

What the Guidelines actually say about unilateral APAs

This is sharper than most summaries suggest. Paragraph 4.141 records that because of concerns over double taxation most jurisdictions prefer bilateral or multilateral APAs, and that some jurisdictions will not grant a unilateral APA at all. The bilateral or multilateral approach, it says, is far more likely to ensure the arrangements reduce the risk of double taxation, are equitable to all tax administrations and taxpayers involved, and provide greater certainty.

The same paragraph contains a drafting convention that catches people out: for the purposes of that section, an APA is not intended to include a unilateral arrangement except where specific reference to a unilateral APA is made. So when Chapter IV says APA unqualified, it means bilateral or multilateral.

Paragraph 4.158 states the problem squarely. Unilateral APAs may present significant problems for tax administrations and taxpayers alike, because other administrations may disagree with the conclusions. Unlike bilateral or multilateral APAs, their use may not lead to an increased level of certainty or a reduction in double taxation for the group. If a taxpayer accepts an arrangement that over-allocates income to the granting jurisdiction in order to avoid lengthy and expensive enquiries or excessive penalties, the administrative burden shifts from that jurisdiction to others. Taxpayers, the Guidelines say, should not feel compelled to enter into APAs for those reasons.

Two protections follow. Paragraph 4.140 says that where unilateral APAs are permitted, other interested competent authorities should be informed as early as possible, that jurisdictions should not require a taxpayer to waive access to the mutual agreement procedure as a condition, and that where another jurisdiction raises an adjustment on a covered transaction the first jurisdiction is encouraged to consider a corresponding adjustment rather than treat the unilateral APA as an irreversible settlement. Paragraph 4.173 recommends that wherever possible an APA should be concluded bilaterally or multilaterally through the mutual agreement procedure.

The treaty basis is constructed, not express

Worth knowing if anyone asks where the authority comes from. Paragraph 4.150 says APAs involving a treaty partner's competent authority should be considered within the scope of the mutual agreement procedure under Article 25 even though such arrangements are not expressly mentioned there. The reasoning runs through Article 25(3), which has competent authorities endeavour to resolve by mutual agreement any difficulties or doubts as to interpretation or application, and through the Commentary's acknowledgement that such issues may arise in connection with an individual case.

That has a practical consequence at paragraph 4.152: some jurisdictions lack a domestic law basis for APAs, but where a treaty contains an Article 25-style clause the competent authorities generally should be allowed to conclude one, the arrangement would be legally binding on both states and create rights for the taxpayers, and because treaties take precedence over domestic law the absence of a domestic basis does not prevent it.

Rollback, and an asymmetry worth noting

Paragraph 4.147 confirms an APA applies to prospective years and transactions, and that it can provide an opportunity to apply the agreed methodology to similar issues in open prior years. Four conditions attach: the agreement of the tax administration, the taxpayer and where appropriate the treaty partner; open prior years only; applicable time limits such as domestic statutes of limitation; and the same relevant facts and circumstances, subject to verification on audit.

The asymmetry is this. Having a bilateral APA programme at all is only a non-binding best practice under BEPS Action 14, recommended for jurisdictions once they have the capacity. But for jurisdictions that do have such a programme, providing for rollback is part of the Action 14 minimum standard. These two are frequently stated the other way round, or both described as minimum standards.

And the resource warning nobody quotes

Paragraph 4.161 notes that an APA programme may initially strain transfer pricing audit resources, because administrations generally divert resources earmarked for examination, advising and litigation, and that the programme as a whole will tend to be led by the demands of the business community rather than the administration's own resource planning. Renewing an APA, it adds, is likely to be less time-consuming than initiating one.

Paragraph 4.163 goes further, warning of a serious danger of audit resources and expertise being diverted to APA taxpayers and away from less compliant ones. And paragraph 4.162 cautions against treating concluded APAs as precedent, since their results may not be representative across all markets. Nothing in Chapter IV Section F gives a figure for how long an APA takes.

Now the documentation split, and why it makes sense

Annex I to Chapter V, which sets out the master file contents, requires a list and brief description of the group's existing unilateral advance pricing agreements and other tax rulings relating to the allocation of income among jurisdictions.

Annex II, the local file, requires a copy of existing unilateral and bilateral or multilateral APAs and other tax rulings to which the local tax jurisdiction is not a party and which are related to the controlled transactions described in that file.

Three precision points, each of which changes how the requirement is met. The master file asks for a list and brief description; the local file asks for a copy. The master file is limited to unilateral APAs; the local file covers unilateral and bilateral or multilateral. And the local file carries a second limb that is routinely dropped: only APAs related to the controlled transactions already described in that file, not every third-party arrangement in the group.

The logic becomes clear once you ask what each reader can already see. A unilateral APA is concluded without the other affected administrations, may affect the tax liability of associated enterprises elsewhere, and can shift administrative burden to jurisdictions that never agreed to it. Those are exactly the instruments whose income-allocation effects are invisible outside the one jurisdiction that granted them, so a group-wide register belongs in the document every participating administration receives. A bilateral APA needs no such disclosure there, because both affected administrations negotiated it and already hold it.

The local file is read by one administration assessing one entity's material transactions. An APA it signed itself, it has. What it cannot see is an arrangement between the counterparty and another administration that nonetheless fixes the pricing of the very transaction under examination. Hence the not-a-party limb, and hence a copy rather than a list: the examiner needs the operative terms, not an inventory.

Read as one system, the two annexes close an information asymmetry from both ends. The full contents of both documents, including the details most summaries omit, are set out in our guide to what the master file and local file must contain, and the pricing side is covered in the method selection hierarchy. For the treaty-side question of where a group actually has a taxable presence, see our piece on the OECD's deleted home-office guidance.

One citation note for anyone quoting these annexes. Annex I says agreements where the glossary and Chapter IV say arrangements, an inconsistency inherited from the Action 13 report, so quoting it verbatim will look like your error unless you flag it. The detailed procedural guidance for APAs under the mutual agreement procedure, adopted in October 1999, is in Annex II to Chapter IV rather than in Chapter V. The Guidelines are published in full by the OECD, and the January 2022 edition remains the current consolidated one.