08 Apr Advance Pricing Agreements
The main benefits of an APA include: – the prevention of tax controls for APA-covered transactions (reducing costs and related efforts) and eliminating any transfer pricing adjustments: – removal of late interest and penalties for possible transfer pricing adjustments; Eliminating the costs of establishing the transfer pricing record for APA-covered transactions (during the period during which the APA is in effect); Avoid double taxation. A Pre-Pricing Agreement (APA) is an agreement between tax authorities and taxpayers on the future implementation of transfer pricing policies. An APA can be an effective measure to reduce transfer pricing risks for many tax payers, ensuring that the level of future profitability is accepted as appropriate by the tax authorities. A Pre-Pricing Agreement (APA) is a procedural agreement between one or more tax payers and one or more tax authorities, which aims to avoid transfer pricing disputes by pre-defining a set of criteria for certain cross-border controlled transactions within a specified time frame, to ensure that they respect the length-of-arm principle. In its application, the applicant determines the content of the APA. The application must define the scope of both time and substance. In addition, it is worth mentioning the other countries with which a pre-agreement on transfer pricing is to be concluded. If an applicant requests a multilateral APA (with more than two participating states), the APA consists of several bilateral APAs. In October 1999, the OECD published an update of the OECD guidelines on clearing prices for multinational companies and tax administrations in 1995 (the so-called “guidelines”). This update takes the form of a new schedule to the guidelines, which contains guidelines for the implementation of ex ante price agreements as part of the Mutual Agreement Procedure (MAP-APAs). The annex is an integral part of the guidelines, as evidenced by the OECD Council`s decision of 28 October to amend its original 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. An APA is an administrative approach that aims to avoid transfer pricing disputes by establishing criteria for applying the arm length principle to transactions prior to such transactions. This contrasts with traditional audit techniques that verify whether transactions that have already taken place reflect the application of the arm length principle. Such approaches were relatively new at the time the 1995 OECD Council adopted the guidelines, and the tax committee therefore indicated, in point 4.161 of the transfer pricing guidelines, that it intended to “carefully monitor any extensive use of the APA and promote greater consistency in practice among countries that choose to use them.” In addition, point 4.163 of the guidelines states that “if possible, an APA must be concluded on a bilateral or multilateral basis between the relevant authorities as part of the treaty`s mutual agreement procedure.” Download our transfer pricing leaflet for more details Bilateral and multilateral APAs are generally bilateral or multilateral – that is, they also enter into agreements between the taxpayer and one or more foreign tax administrations under the control of the Mutual Agreement Procedure (MAP) under Denerl`s tax treaties.  The subject benefits from such agreements, since he is assured that income from covered transactions is not subject to double taxation on the part of the IRS and the relevant foreign tax authorities. The IRS policy is to “encourage” taxpayers to apply for bilateral or multilateral APA where there are provisions of the competent authority.