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Advance pricing agreements

Availability and eligibility

Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?

Yes, advance pricing agreements (APAs) are available. APAs may be unilateral, bilateral or multilateral. US APA procedures are set out in Revenue Procedure 2015-41, 2015-35 IRB 263 (August 31 2015).

APAs can cover any type of transaction that is subject to the US transfer pricing rules, as well as income allocations attributable to US permanent establishments. There is no limit on the types of entity that can apply for an APA. Details of the types of taxpayer that apply for APAs, the types of transaction covered, the transfer pricing methods agreed and other details can be found in the APA report filed by the Internal Revenue Service (IRS) each year (see IRS Announcement and Report Concerning Advance Pricing Agreements, March 27 2017).

Rules and procedures

What rules and procedures apply to advance pricing agreements?

The US APA rules and procedures are set out in Revenue Procedure 2015-41, 2015-35 IRB 263 (August 31, 2015).

The essential processes for obtaining an APA generally include:

  • a process during which US and related taxpayers and their advisers, consider whether the APA process is appropriate to achieve their goals;
  • a pre-filing process, during which the US taxpayer and the IRS can explore whether the taxpayer’s transfer pricing goals are suitable for a resolution through the APA process;
  • a written request for an APA, which includes:
    • identifying details for the controlled taxpayers and controlled transactions that will be subject to the proposed APA;
    • proposed transfer pricing methods for proposed APA transactions and, in most cases, a proposed range of arm’s-length results to be agreed; and
    • extensive documentation and analysis to support the taxpayer’s proposal;
  • due diligence by the IRS, including written questions, on-site interviews or both;
  • post-APA request conferences to discuss the APA request, explain responses to questions and negotiate an IRS position;
  • in the case of a bilateral or multilateral APA, negotiations between the IRS and one or more competent authorities;
  • in the case of a bilateral or multilateral APA, a mutual agreement between the IRS and foreign competent authorities;
  • the drafting and execution of the US APA document and, if relevant, any rollback documents; and
  • post-APA procedures, including the filing of APA annual reports, potential APA adjustments and potential cash repatriation procedures.


How long does it typically take to conclude an advance pricing agreement?

The general time to complete an APA is three to four years.

What is the typical duration of an advance pricing agreement?

APAs generally cover five tax years, although longer or shorter APAs are possible. The IRS generally tries to have at least three prospective APA tax years when it begins APA negotiations with a treaty partner. APAs may also be used to resolve transfer pricing issues in years before the APA term begins. The retroactive application of an APA is known as an APA ‘rollback’ and pre-APA tax years are referred to as APA ‘rollback years’.


What fees apply to requests for advance pricing agreements?

Section 3 of the Appendix to Revenue Procedure 2015-41 provides for two levels of fees for initial APA requests, depending on the combined gross income of the taxpayer and all commonly controlled foreign and US parties for their most recently completed 12-month fiscal year. The standard user fee for an initial APA request is $60,000. The fee for APA renewal requests is generally $35,000.

A taxpayer may file an unlimited number of initial APA requests within a single 60-day period for a single fee, provided there are no more than two competent authorities. If there are more than two competent authorities involved, $30,000 must be paid for each request.

The user fee for each initial or renewal small business APA request is generally $30,000. Transactions will qualify for this reduced fee if:

  • the request involves tangible property and services whose total annual value does not exceed $50 million; or
  • the request involves payments for intangible property which do not exceed $10 million annually.

The reduced fee also applies to any taxpayer that has an annual gross income of less than $500 million after taking into consideration the income of its commonly controlled affiliates.

Special considerations

Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?

At the heart of an APA is the agreement among the tax authorities to give effect to the approved transfer pricing method (TPM). A TPM will generally provide for a range of arm’s-length results, rather than a single result. Generally speaking, the majority of US APAs  use the comparable profits method (CPM) as the TPM. Less frequently, an APA will use one of the traditional transfer pricing methods recognised by most Organisation for Economic Cooperation and Development member countries – such as a comparable uncontrolled price, a resale price or cost-plus methods – or certain other methods (eg, reasonable profit-split) that have gained some acceptance as a fourth method.

The TPM of an APA is not limited to the CPM or traditional methods, however, as a general rule, the CPM is used as a starting point or frame of reference for the vast majority of US APA negotiations.

The acceptance by the tax authorities of the taxpayer’s TPM or the defined range of results is the ultimate goal for the taxpayer seeking the APA. The agreement not only assures the taxpayer that there will be no adjustment in the event that the TPM is followed and the results are within the specified range, but also relieves the taxpayer of the onus resulting from a detailed audit inquiring into the appropriateness of a particular TPM or the results thereunder.

A pioneering aspect of the APA is the provision that allows for voluntary (previously called ‘compensating’) transfer adjustments or what Revenue Procedure 2015-41 refers to as an ‘APA primary adjustment’. This provision applies when the results of applying the TPM are outside the range of results specified in the APA.

Finally, the APA will specify the period to which it applies. Historically, an APA was applicable for three to five taxable years. The existing IRS preference expressed in Revenue Procedure 2015-41 is that an APA term is generally five years, in the absence of a compelling reason for a shorter term. In many cases, due to delays in negotiating the agreement, an APA will be executed for longer than five years. Further, under certain circumstances, the principles of the APA may be applied by the IRS to all of the taxpayer’s open years (ie, a so-called ‘rollback’), even though the APA itself is prospective.

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