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. 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. 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). 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.
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. A Prior Pricing Agreement (APA) is a prior pricing agreement between a taxpayer and a tax authority on an appropriate transfer pricing methodology (TPM) for a set of transactions that take place over a period of time (referred to as „covered transactions“). 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. Bilateral and multilateral APAs are generally bi- or multilateral – that is, they also include agreements between the taxpayer and one or more foreign tax administrations under the control of the Mutual Understanding Procedure (MAGP) provided for in income tax treaties.  The taxpayer benefits from such agreements because he is assured that income associated with recorded transactions is not subject to double taxation by the IRS and the relevant foreign tax authorities. Irs policy is to „encourage“ taxpayers to apply for bilateral or multilateral APAs where competent authority provisions exist. For these reasons, prior price agreements are not common; For relatively simple transactions, the time and cost of obtaining an APA is not justified. 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. Unilateral APAs However, it is possible for a taxpayer to negotiate a unilateral APA involving only the taxpayer and the IRS. In this case, both parties are negotiating an appropriate TPM for U.S. tax purposes only. If the taxpayer is involved in a dispute with a foreign tax authority over the transactions in question, the taxpayer may remedy the situation by requesting the competent U.S. authority to initiate a mutual agreement procedure. Of course, this presupposes that an applicable tax treaty is in force with foreign countries. 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.
An APA usually has a duration of five years; Taxpayers can sometimes extend this period by negotiating a „rollback“ to the date of the request to cover the usual time required to ensure the execution of the agreement. In addition, taxpayers may request the renewal of existing APAs before they expire in order to extend the agreement for a jointly agreed period. 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. 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. An ABS application requires the full disclosure of information, which can be a major barrier for taxpayers concerned about the protection of trade secrets. Although an APA requires significant disclosure, it is less than what is typically required for an audit of a TPM. 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. 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. Prior approval of the transfer pricing method is the main advantage of an APA. .