A pre-price agreement (APA) is a prior agreement between a tax payer and a tax authority on an appropriate transfer pricing method (TPM) for a number of transactions involved during a specified period (“covered transactions”). In October 1999, the OECD published an update of the OECD guidelines on clearing prices for multinational companies and tax administrations in 1995 (the so-called “guidelines”). This update takes the form of a new schedule to the guidelines, which contains guidelines for the implementation of ex ante price agreements as part of the Mutual Agreement Procedure (MAP-APAs). The annex is an integral part of the guidelines, as evidenced by the OECD Council`s decision of 28 October to amend its original recommendation on the 1995 guidelines to include the new guidelines in this annex. It therefore has the same status as the eight existing chapters of the guidelines. APAs provide a mechanism to manage and reduce your transfer pricing risk by providing greater security on a prospective basis. The launch of an APA fosters constructive cooperation based on mutual trust, based on early engagement and full and open disclosure throughout the development of the APA. Entering an APA reduces the potential for double taxation in your secret cross-border transactions. Typically, a bilateral APA is a binding agreement between two tax administrations and the taxpayers concerned. This agreement is concluded by referring to the corresponding double taxation agreement. It regulates the tax treatment of future transactions between related subjects.
The AAAs offer you the opportunity to reach an agreement with us on the future application of the principle of arm length to your relations with international relatives. Bilateral and multilateral APAs are generally bilateral or multilateral, i.e. they also enter into agreements between the subject and one or more foreign tax administrations under the control of the Mutual Agreement Procedure (POP) under the tax treaties.  The subject benefits from such agreements, since he is assured that income from covered transactions is not subject to double taxation on the part of the IRS and the relevant foreign tax authorities. The IRS policy is to “encourage” taxpayers to apply for bilateral or multilateral APA where there are provisions of the competent authority. However, it is possible that a subject may be able to negotiate a unilateral APA involving only the taxpayer and the IRS. In this case, both parties negotiate an appropriate TPM only for U.S. tax purposes. If the taxpayer is involved in a dispute with a foreign tax authority over the registered transactions, he can apply for a discharge by asking the competent US authority to initiate a procedure of mutual agreement. This, of course, implies the entry into force of an applicable foreign income tax agreement. The operation of the APA may depend on compliance with certain requirements and compliance with certain critical assumptions.
If you have done so, we will be administratively bound by the provisions of the APA and we will not collect additional income tax on the basis of prices developed by the APA for covered cross-border transactions.