This section deals with the critical assumptions underlying an APA.

The section contains the following:

  • What are critical assumptions?
  • What happens if the critical assumptions are no longer met?
  • Annual APA reporting.

What are critical assumptions?

Since APAs will normally consist of a description of the agreed transfer pricing method etc. over a period of several years, certain critical assumptions will form the basis of such arrangements.

Critical assumptions are any facts that are essential for the continued validity of the APA. Such critical assumptions may be facts and circumstances relating to the applicant or third parties, relating to an industry or general economic conditions.

A critical assumption, which is affected by the applicant itself, may be the structure of the enterprise or the nature and extent of the functions performed, the assets used and risks assumed. A critical assumption, which the applicant itself has little or no influence over, may, for example, be the expected business volume, changes in interest rates or new legislation within the respective area of activity.

What happens if the critical assumptions are no longer met?

It will typically be outlined in the APA that the enterprise must inform the tax authorities if, within the specified period, one or more of the agreed critical assumptions are no longer met.

It depends on the contents of the APA how a change in the critical assumptions will affect the continued validity of the APA. Normally, the consequence is that the two tax authorities will negotiate further and try to reach a new agreement. In practice, the Danish competent authority as well as most of the other tax authorities would expect the enterprise to contact the tax authorities as soon as possible for clarification of the future tax treatment. There is no requirement that an APA should continue to exist, but normally all parties will have an interest in adjusting the existing APA in such a way that it is adjusted to the new conditions. An obligation to renegotiate the arrangement may also be inserted.

The Danish competent authority has not yet encountered any breaches of the critical assumptions in the arrangements entered into previously.

Annual APA reporting

A bilateral or multilateral APA will often be concluded on the condition that a brief specified statement is appended to the annual tax return confirming that the conditions specified in the APA, including the agreed critical assumptions, are still met.