Prior price agreements can be unilateral (negotiated with one tax authority), bilateral (negotiated with two tax authorities) or multilateral (negotiated with more than two tax authorities). Although unilateral APAs are less complicated to obtain than those involving more than one tax authority, most apAs negotiated with the IRS since 1991 – nearly 70% – have been bilateral agreements. 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. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide guidance on the application of the arm`s length principle, i.e. on the tax assessment of cross-border transactions between affiliates. In a global economy where multinational corporations (MULTINATIONALS) play a leading role, transfer pricing is high on the agenda of tax administrators and taxpayers. Governments must ensure that the taxable profits of multinational corporations are not artificially displaced outside their territory and that the tax base reported by multinational corporations in their respective countries reflects the economic activity carried out there. It is essential that taxable taxpayers limit the risks of economic double taxation that may arise from a dispute between two countries over the imposition of arm`s length remuneration for their cross-border transactions with affiliates.
In terms of disadvantages, getting an initial pricing agreement takes a long time; As mentioned earlier, the average APA takes two years between application and approval. There are also costs associated with following up on an APA. In addition to the user fee to apply to the APA – which currently stands at $113,500 (prices are lower for small businesses) – there is the cost of hiring consultants to work – usually transfer pricing specialists who have experience with initial pricing agreements. 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. Since the taxpayer must seek the agreement and negotiate with any tax authority relevant to the transaction(s) – and these authorities can also negotiate with each other – there is a lot of back and forth in the process that extends the schedule. It takes an average of two years to reach an agreement, from application to approval; In the case of complex or multilateral initial pricing agreements, this schedule is usually longer. 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.
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. 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. 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. 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`. 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. Following their original publication in 1979, the OECD Transfer Pricing Guidelines were approved by the OECD Council in their original version in 1995. A limited update was carried out in 2009, mainly taking into account the adoption of a new article 25, paragraph 5, on arbitration and the amendment of the commentary on article 25 on mutual agreement procedures for the settlement of cross-border tax disputes in the 2008 update of the Model Convention. In the 2010 edition, Chapters I to III were extensively revised, with new guidance on: choosing the transfer pricing method most appropriate to the circumstances of the case; the practical application of transactional profit methods (net transaction margin method and profit sharing method); and to carry out comparability analyses. In addition, a new Chapter IX on transfer pricing aspects of corporate restructuring has been added. Consistency changes have been made to the other guidelines. For these reasons, prior price agreements are not common; For relatively simple transactions, the time and cost of obtaining an APA is not justified. 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. As the small number of amounts executed each year shows, initial pricing agreements are not an easy process to tick off. They require a lot of time and resources to secure them. However, in some scenarios, it is worth looking for an APA. 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. 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. In general, APAs are particularly useful for complex transactions that would otherwise require lengthy audits by tax authorities.
In these situations, it may be beneficial to obtain an APA to avoid auditing. Initial pricing agreements can also be useful in risky transactions where important questions may arise about the transfer pricing method used and its application. B for example in the transfer of intellectual property (IP). Advance Pricing Agreements (“APAs”) are discussed in detail in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in Chapter IV, Section F. English Also available in: Italian, Slovenian, Serbian, German, French, All The Annex begins with the definition of the different types of ABS and describes the objectives of the ABS process. .