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Considering and Negotiating an Advance Pricing Agreement

In today’s global economy, value chains often span numerous countries, making transfer pricing matters increasingly complex with no straightforward solutions. Tax authorities worldwide are intensifying their focus on pricing of intercompany transactions, driven not only by the vast volume of cross-border payments, but also by the inherent ambiguity of transfer pricing, which often leads to disputes.

Advance pricing agreements (“APAs”) are generally recognized as a common-sense alternative to potentially costly transfer pricing examinations. The APAs process allows the taxpayer and the IRS to avoid future transfer pricing disputes with respect to the subject matter of the APA by entering into a prospective agreement, generally covering at least five tax years, regarding the taxpayer’s transfer prices.  Over 75 countries have adopted an APA program or similar procedure to obtain prospective confirmation of a taxpayer’s transfer prices, with more than 85% of these jurisdictions allowing taxpayers to enter into bilateral APAs.

This special report, Considering and Negotiating an Advance Pricing Agreement, created in collaboration with Grant Thornton LLP and KPMG LLP, details the practical steps in negotiating an APA with the IRS. The report specifies the covered transactions, transfer pricing method, APA term, operational and compliance provisions, appropriate adjustments, critical assumptions regarding future events, required APA records, and annual compliance reporting responsibility.

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