Question

Are advance pricing agreements (APA) just another way for government entities to export their work to corporations?

Answer 1

An APA is an agreement between

a tax payer and tax authority

determining the transfer pricing

methodology for pricing the tax

payer’s international transactions

for future years. The methodology

is to be applied for a certain period

of time based on the fulfillment of

certain terms and conditions (called

critical assumptions).

An APA can be unilateral, bilateral,

or multilateral.

• Unilateral APA: an APA that

involves only the tax payer and

the tax authority of the country

where the tax payer is located.

• Bilateral APA (BAPA): an APA

that involves the tax payer,

associated enterprise (AE) of the

tax payer in the foreign country,

tax authority of the country

where the tax payer is located,

and the foreign tax authority.

• Multilateral APA (MAPA): an

APA that involves the tax payer,

two or more AEs of the tax payer

in different foreign countries, tax

authority of the country where

the tax payer is located, and the

tax authorities of AEs.

An APA provides the following

benefits-

• Certainty with respect to tax

outcome of the tax payer’s

international transactions,

by agreeing in advance the

arm’s length pricing or pricing

methodology (ies) to be applied

to the tax payer’s international

transactions covered by the APA;

• Removal of an audit threat

(minimize rigours of audit), and

deliverance of a particular tax

outcome based on the terms of

the agreement;

• Substantial reduction of

compliance costs over the term

of the APA; and

• For tax authorities, an APA

reduces cost of administration

and also frees scarce resources.