Advance Pricing Agreements (APAs) are a useful tool for multinational companies to manage transfer pricing risks and provide tax certainty. An APA is an agreement between a taxpayer and a tax authority, which sets out the method for determining the transfer pricing of cross-border transactions. APAs provide taxpayers with the opportunity to resolve transfer pricing disputes with tax authorities in a proactive and collaborative manner.
In the United States, the IRS’s APA program has strict case management procedures in place, with additional taxpayer disclosure requirements. An APA case will not start until the submission is substantially complete, and there are updated taxpayer conditions upon which an APA may be cancelled or revoked. The IRS charges a user fee for APA applications, which is designed to cover the costs of administering the program. The program also provides for user fee simplification.
A taxpayer may apply for a unilateral, bilateral or multilateral APA. The term of an APA is normally five years, but it may be lengthened as appropriate. A taxpayer may apply for an APA for various reasons, including certainty regarding the transfer pricing process, method selection, comparables and penalty protection.
An APA may be rolled back to earlier years at the taxpayer’s request with the agreement of the IRS district office. This may be requested at any time before conclusion of the agreement. Even if the taxpayer does not request a roll back, the IRS may decide that the transfer pricing method used in the APA is also appropriate for previous periods.
The IRS may revoke the APA if it considers that there has been fraud, malfeasance or disregard by the taxpayer about material facts presented in the APA application or subsequent annual reports or if there is a lack of good faith in compliance with the APA. The revocation of the APA could be made retroactive to the original effective date of the APA.
If there is a change in a critical assumption or a relevant law or treaty, the APA may be revised. The taxpayer should notify the IRS of any changes in circumstances, at the latest by the date of the first annual return following the change. Where the IRS and the taxpayer cannot agree on a revised APA, the original APA is cancelled from the beginning of the year in which the change in circumstances occurs.
In conclusion, APAs are a valuable tool for multinational companies to manage transfer pricing risks and provide tax certainty. The US IRS’s APA program has strict case management procedures in place, with additional taxpayer disclosure requirements. APAs are available in unilateral, bilateral, and multilateral forms and have a term of five years that may be lengthened as appropriate. The IRS may revoke the APA if there has been fraud, malfeasance or disregard by the taxpayer about material facts presented in the APA application or subsequent annual reports. Additionally, if there is a change in a critical assumption or a relevant law or treaty, the APA may be revised.