An APA is a formal agreement between a taxpayer and one or more tax authorities to determine and set transfer pricing for transactions between the taxpayer and its related parties. APAs typically last five years or more with the possibility of renewal and restoration. Bilateral APAs can also reduce annual compliance costs. Although the taxpayer still needs to prepare a transfer pricing report, it is less comprehensive than a typical annual transfer pricing report. Most taxpayers request pre-price agreements a year or more before they are needed, with the intention of having them approved and implemented before the transactions in question take place. In reality, it often doesn`t work that way because of the time it takes to get approval. This makes negotiating restore extensions that cover the period leading up to formal APA approval a feature in many APAs. An APA is an administrative approach that aims to prevent transfer pricing disputes by establishing criteria to apply the arm`s length principle to transactions prior to such transactions. This contrasts with traditional audit techniques, which check whether transactions that have already taken place reflect the application of the arm`s length principle. These approaches were relatively new at the time of the ADOPTION of the 1995 Guidelines by the OECD Council, so the Budget Board stated in paragraph 4.161 of the Transfer Pricing Guidelines that it intended to “carefully monitor any expanded application of ABS and promote greater consistency in practice among countries that choose to apply them”. In addition, Article 4.163 of the Guidelines states that `an APA should, as far as possible, be concluded on a bilateral or multilateral basis between the competent authorities in the context of the procedure for the agreement of the relevant treaty`. Tax authorities may not always agree with your company`s pricing agreements and policies, which can lead to audits and adjustments.
Economic double taxation may also occur if adjustments are made in one country without a corresponding adjustment being made in the other territory concerned. The uncertainty associated with these issues can make it difficult for your group to manage its effective tax rate and lead to higher-than-expected tax risk. Since its inception in 1991, when Apple Computer Corporation entered into the first Advance Pricing Agreement (APA) with the IRS, APAs have been used by multinationals to avoid transfer pricing risks and provide a certain level of certainty in their transfer pricing strategies. To initiate an APP, the taxpayer contacts the tax administration, submits an application and prepares a presentation or report setting out the procedural rules for the transaction(s) that the APA will cover, the proposed transfer pricing method and the expected results. From that point on, the rest of the process is a negotiation. So, what is an initial pricing agreement? In this article, we define an APA, describe the procedure for obtaining an APA, and look at the pros and cons of an APA. Prior approval of the transfer pricing methodology is the main advantage of an ABS. Early acceptance of the TPM gives the taxpayer peace of mind that the tax authority will not make any adjustments if the conditions of the APA are met, and the tax authority will not review any transactions covered by the APA for the duration of the term.
An initial pricing agreement is an agreement between a taxpayer and a tax authority concluded in advance using a transfer pricing method (TPM) appropriate for a particular group of transactions over a period of time. Under the agreement, the taxpayer undertakes to adhere to a transfer pricing method that the tax administration does not wish to contest, provided that it complies with all the conditions of the agreement. In October 1999, the OECD published an update of the 1995 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “Guidelines”). This update takes the form of a new annex to the Guidelines, 91 containing guidelines for the implementation of advance pricing agreements under the mutual agreement procedure (APP MAP). The Annex will form part of the Guidelines, as contained in the DECISION of the OECD Council of 28 October to amend its initial Recommendation on the 1995 Guidelines to include the new Guidelines in this Annex. It therefore has the same status as the eight existing chapters of the Guidelines. Only a few initial price agreements are successfully concluded each year in the United States. In 2020, there were only 127; This number is not significantly higher than the 71 APAs performed on average over the 29-year life of the program per year. Growth in abs utilization has been fairly consistent with growth in the global economy since the program began. Due to the relative scarcity of initial pricing agreements, few professionals have experience in handling.
At Valentiam, we have extensive experience in negotiating APAs and can do the job at a cheaper price than the four major accounting firms. Companies that work with Valentiam to secure APAs receive a more cost-effective service without sacrificing their expertise. Contact us to find out how we can help your business with all your transfer pricing and valuation needs. While securing an APA takes a lot of time and money, there are transactions where the security provided by the APA is worth it. For cases where finding an APA makes sense, it is important to hire the services of an experienced advisor such as Valentiam`s transfer pricing experts. Bilateral and multilateral ABS are generally bilateral or multilateral, i.e. they include agreements between the taxpayer and one or more foreign tax administrations that are under the supervision of the Mutual Understanding Procedure (MAGP) provided for in income tax treaties.  The taxpayer benefits from such agreements because he is assured that income associated with recorded transactions is not subject to double taxation by the IRS and the relevant foreign tax authorities.