Advance pricing agreement

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An advance pricing agreement (APA) is an ahead-of-time agreement between a taxpayer and a tax authority on an appropriate transfer pricing methodology (TPM) for a set of transactions at issue over a fixed period of time [1] (called "Covered Transactions").

In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. Because of the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries can adjust intragroup transfer prices that differ from what would have been charged by unrelated enterprises dealing at arm’s length. The OECD and World Bank recommend intragroup pricing rules based on the arm’s-length principle, and 19 of the 20 members of the G20 have adopted similar measures through bilateral treaties and domestic legislation, regulations, or administrative practice. Countries with transfer pricing legislation generally follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in most respects, although their rules can differ on some important details.

Most APAs involve U.S. taxpayers and the US Internal Revenue Service (IRS), but APAs are also made outside the United States. [2]

Internal Revenue Service revenue service of the United States federal government

The Internal Revenue Service (IRS) is the revenue service of the United States federal government. The government agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue, who is appointed to a five-year term by the President of the United States. The IRS is responsible for collecting taxes and administering the Internal Revenue Code, the main body of federal statutory tax law of the United States. The duties of the IRS include providing tax assistance to taxpayers and pursuing and resolving instances of erroneous or fraudulent tax filings. The IRS has also overseen various benefits programs, and enforces portions of the Affordable Care Act.

Bilateral and multilateral APAs
APAs are generally bi- or multilateral—i.e. they also include agreements between the taxpayer and one or more foreign tax administrations under the authority of the mutual agreement procedure (MAP) specified in income tax treaties. [3] The taxpayer benefits from such agreements since they are assured that income associated with covered transactions is not subject to double taxation by the IRS and the relevant foreign tax authorities. It is IRS policy to "encourage" taxpayers to seek bilateral or multilateral APAs where competent-authority provisions exist.

Many countries have entered into tax treaties with other countries to avoid or mitigate double taxation. Such treaties may cover a range of taxes including income taxes, inheritance taxes, value added taxes, or other taxes. Besides bilateral treaties, multilateral treaties are also in place. For example, European Union (EU) countries are parties to a multilateral agreement with respect to value added taxes under auspices of the EU, while a joint treaty on mutual administrative assistance of the Council of Europe and the Organisation for Economic Co-operation and Development (OECD) is open to all countries. Tax treaties tend to reduce taxes of one treaty country for residents of the other treaty country to reduce double taxation of the same income.

Double taxation is the levying of tax by two or more jurisdictions on the same declared income, asset, or financial transaction. Double liability is mitigated in a number of ways, for example:

Unilateral APAs
It is possible, however, that a taxpayer may negotiate a unilateral APA involving only the taxpayer and the IRS. In this case, the two parties negotiate an appropriate TPM for U.S. tax purposes only. Should the taxpayer be involved in a dispute with a foreign tax administration regarding the covered transactions, they may seek relief by requesting that the U.S. competent authority initiate a mutual agreement proceeding. This assumes, of course, that there is an applicable income tax treaty in force with the foreign country.

The APA Program
Each APA is handled by an APA team. One of the APA Program's designated team leaders is responsible for assembling the team, and it will generally consist of an economist, an international examiner, a LMSB field counsel, and—in bi- or multilateral cases—a U.S. competent-authority analyst tasked with leading discussions with treaty partners. Other team members may include an LMSB International Technical Advisor, LMSB exam personnel, or an Appeals Officer.

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Indian Revenue Service (Income Tax)

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References

  1. ↑ OECD Transfer Pricing Guidelines – 2009
  2. ↑ Mutual Agreement Procedures (MAPs) and Advance Pricing Arrangements (APAs), Retrieved November 17, 2013
  3. ↑ INTM422030 - Transfer pricing: methodologies: Advance Pricing Agreements: types of agreement, Retrieved November 17, 2013
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