The APA negotiations require significant contributions from taxpayers and the relevant authorities. Therefore, the APA procedure is particularly appropriate in cases where the parties must agree on essential transfer pricing that can be interpreted. Before applying for an APA, the subject should have preliminary discussions with the appropriate authority to determine whether the APA procedure is appropriate to the issue of the transfer pricing of the subject. The objective of the preliminary discussions is to choose the most appropriate method in each case. Preliminary decisions by the Finnish tax administration or the central tax office do not eliminate the risk of international double taxation. The question of how a transaction made by related parties is handled in the context of the imposition of the other party remains unresolved in these decisions. On the other hand, the process of negotiating an APA between two or more states can be lengthy and will not necessarily lead to an agreement. Here, a parent company in Japan say, can charge an advantageous price to its subsidiary in India to minimize its tax payment in India. Let us suppose, for example, that Maruti Suzuki India has higher profits and has to pay higher taxes to the Indian government.
In this case, if Suzuki charges Japan a high price for a component it sold to Maruti, Maruti`s profits will decline and the company`s tax payment to GoI will also decrease. On the other hand, Suzuki Japan`s revenues will increase. Overall, the suzuki motor coroporation (SMC), which is owned by Maruti in India, improves on position; but influences GoI`s tax revenues. It is recommended that APA be compiled as soon as possible. The time required to process the application must also be taken into account. In line with EU recommendations, the application should be processed within 18 months. In practice, processing times are much longer. This observation is based on EU statistics (which also contain unilateral APAs from individual states and preliminary decisions).
The tax exercises covered by the APA are defined separately in the APA between the relevant authorities. To avoid such manipulation, the Indian tax department imposes the price of different components between Maruti and SMC. At the beginning of a year, the price calculated for intra-company transactions is set in advance and maintained for the next five years. This price agreement between Maruti and India`s tax service is called the Early Price Agreement. A pre-price agreement can only be reached if the agreement count is in accordance with the principle of arm length. This means that under the solution resulting from the APP negotiations, Finland must be entitled to a share of tax revenues on the basis of a length generated by the transactions mentioned in the agreement.