Transfer pricing is regarded as the most divisive tax issue for multinational enterprises (MNEs), as tax experts and advisers are aware. MNEs have a variety of options for addressing transfer pricing problems.

Option 1: To determine and record the arm’s length price for controlled transactions, MNEs can conduct a transfer pricing study with the assistance of legal and transfer pricing experts. If the transfer pricing documentation and study are deemed adequate and reasonable, this approach may shield against penalties but does not prevent a tax authority from auditing the transaction.

Option 2: A taxpayer has the option to apply for and receive an APA (bilateral, multilateral, or unilateral). In order to resolve the transfer pricing methodology for pricing the taxpayer’s international transactions in advance for future years, the IRS and the taxpayers (and, if bilateral or multilateral, inclusive of foreign tax authorities) may enter into an APA.

Option 3: The International Compliance Assurance Programme (ICAP) or a joint audit are two other procedures that taxpayers and tax administrations can use to deal with transfer pricing issues.

Principal benefits of an APA:

1. Advance certainty regarding the taxpayer’s transfer pricing for the duration of the APA;

2. The removal of the threat of an audit with regard to the issue covered by the APA, provided the taxpayer complies with the terms and conditions of the APA;

3. Decreased taxpayer compliance costs over the duration of the APA;

4. Penalty protection, provided the taxpayer complies with the APA’s terms and conditions; and 

5. Reduced costs for tax administration for tax authorities. 

An APA is typically processed in the US for a period of time exceeding three years.

Advance Pricing Mutual Agreement (APMA) Program and APAs:

To administer programmes under its purview in a way that complies with U.S. tax treaty obligations, ensures the correct tax bases of the United States and its treaty partners, prevents fiscal evasion, fosters consistency and reasonableness in results, and gives taxpayers access to competent authority assistance and the APA process in accordance with principles of principled, effective, and efficient tax administration.

Conclusion:

When evaluating the pertinent criteria and determining whether an APA is the most effective and efficient workstream for the taxpayer and tax administration(s), APMA personnel are required to follow the defined processes in order to maximise the chances that a taxpayer’s transfer pricing issues as presented in an APA request will be resolved successfully.

In order to properly match the compliance risk posed by the transfer pricing issues proposed to be covered by an APA with the resources that would be needed to achieve the necessary certainty (based on the facts and circumstances) for the taxpayer and the IRS, the evaluation is carried out in consultation with the appropriate personnel.