Transfer pricing, which refers to the pricing of goods and services between related parties across international borders, has been a subject of intense scrutiny by tax authorities around the world in recent years. The United States is no exception, and has established a comprehensive system for the enforcement of transfer pricing rules. One key component of this system is the advance pricing agreement (APA), a mechanism that allows taxpayers and the Internal Revenue Service (IRS) to reach an agreement on the pricing of transactions before they take place.
The US has a long history with APAs, and has one of the most developed and experienced programs among developed countries. The IRS’s APA program is overseen by the APA Policy Board and is part of the Office of the Associate Chief Counsel (International). The program includes the Advance Pricing and Mutual Agreement (APMA) Program, which is a unit within the Large Business and International Division of the IRS. The APMA has five specialized issue/industry coordination teams that cover the specialized areas of cost sharing arrangements, financial products, the semiconductor industry, the automotive industry and the pharmaceutical industry.
The legal basis for the APA program is Revenue Procedure 2006-9, which sets out the procedures the IRS must follow to negotiate an APA. An APA can be performed multilaterally, bilaterally, or unilaterally. The Rev. Proc. outlines the phases of the APA process, which include the APA strategy and transfer pricing memo, pre-filing conference, the formal APA request, negotiation of the APA, and its renewal or termination.
An APA is a binding agreement between the taxpayer and the IRS that provides certainty with respect to transfer pricing for a specified period of time, generally three to five years. The agreement specifies the pricing method to be used, as well as any necessary adjustments, and is based on a thorough analysis of the taxpayer’s business and industry. The APA is subject to annual compliance monitoring, and the IRS may audit the taxpayer during the term of the APA to ensure compliance with the agreed pricing methodology.
An APA can provide several benefits to taxpayers, including reduced uncertainty and the potential avoidance of costly disputes with the IRS. Additionally, an APA can help to demonstrate the taxpayer’s commitment to compliance with transfer pricing rules, which may be viewed favorably by tax authorities.
In summary, the United States has a well-established APA program that provides a mechanism for taxpayers to reach an agreement with the IRS on transfer pricing before transactions take place. The program is overseen by the APA Policy Board and includes the APMA Program, which has specialized teams covering different industries. The legal basis for the program is Revenue Procedure 2006-9, and the APA process includes several phases. An APA can provide significant benefits to taxpayers, including reduced uncertainty and the avoidance of costly disputes.