Advance Pricing Agreement
Encyclopedia
An Advance Pricing Agreement (APA) is an ahead of time agreement between a taxpayer and a taxing authority on an appropriate transfer pricing
methodology (TPM) for some set of transactions at issue over a fixed period of time (called "Covered Transactions").
Most APAs involve US taxpayers and the US Internal Revenue Service
(IRS), but APAs are also made outside the United States.
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
. The taxpayer benefits from such agreements since it is 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.
Unilateral APAs
It's 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, the taxpayer 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, LMSB field counsel, and--in a bi- or multilateral case--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.
Transfer pricing
Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property . Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other...
methodology (TPM) for some set of transactions at issue over a fixed period of time (called "Covered Transactions").
Most APAs involve US taxpayers and the US Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
(IRS), but APAs are also made outside the United States.
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
Tax treaty
Many countries have agreed with other countries in treaties to mitigate the effects of double taxation . Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes...
. The taxpayer benefits from such agreements since it is assured that income associated with Covered Transactions is not subject to double taxation
Double taxation
Double taxation is the systematic imposition of two or more taxes on the same income , asset , or financial transaction . It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country...
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.
Unilateral APAs
It's 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, the taxpayer 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, LMSB field counsel, and--in a bi- or multilateral case--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.