April 01, 1994
Advance Pricing Agreements (APAs)
The APA Program is designed as an alternative dispute resolution that
supplements the traditional administrative, judicial, and treaty mechanisms for resolving
transfer pricing issues. After receiving comments from tax practitioners and tax treaty
partners, and reflecting its experience with several experimental APAs, the Internal
Revenue Service launched the program in March 1991. Revenue Procedure 91-22 (1991-1
C.B.526) details the APA process.
An APA enables a taxpayer to arrive at an understanding
with the IRS on three basic issues:
- the factual nature of the intercompany transactions to which the APA applies;
- an appropriate transfer pricing method applicable to those transactions; and
- the expected range of results from applying this transfer pricing method to the
The IRS and the Treasury Department are pleased with the initial reaction to
the APA Program. It encourages compliance and reduced burdens for taxpayers and the IRS.
Thus far, the process has been flexible, cost effective and accommodating to even unique
taxpayer needs. In particular, the APA Program has proven to be an especially useful
vehicle in allocating the income of global trading businesses between taxing
jurisdictions. Taxpayers who have entered into APAs have been pleased with both the
process and the results.
Before submitting a formal APA proposal, taxpayers are encouraged to meet with
the IRS in one or more informal prefiling conferences. These conferences are held at the
IRS offices in Washington. At these conferences, taxpayers, who can remain anonymous if
they desire, may explore with the IRS the suitability of an APA. Taxpayers generally
discuss their current transfer pricing practices, what data and documentation is necessary
for the APA, the potential suitability of any proposed transfer pricing methodology being
considered, and the IRS schedule and procedures. The meetings typically last two to three
A taxpayer is not required to pursue an APA following a prefiling conference.
However, most go on to submit to the IRS a description of their business and a proposed
transfer pricing methodology. According to taxpayers, the development of the proposal
takes approximately six to eight weeks. For taxpayers with global trading operations, the
functions performed by each trading locations, the trading discretion of employees
involved in global trading, the allocation of risk, the data-capturing capabilities of the
taxpayer's management information system, the proposed transfer pricing methodology, and
significant accounting and management practices that affect that methodology. In general,
the assistance of an economist is not necessary for developing a global trading APA.
Within 60 days after receipt of the submission, the IRS will meet with the
taxpayer to discuss the proposal, give initial reactions and ask for any additional
information if necessary. The IRS will review and evaluate the proposal, a process that
typically takes two to six months depending on the complexity of the case. A
multi-functional team of IRS personnel will be involved in the evaluation. If the APA is
bilateral, both the United States and the appropriate foreign competent authorities may be
involved as well. Based upon this evaluation and additional negotiations between the
taxpayer, the IRS and -if appropriate-the competent authorities, the taxpayer and the IRS
will enter into a binding agreement.
The IRS encourages taxpayers operating in countries that have tax treating with
the United States to pursue competent authority agreements along with the APA. The IRS
generally advises taxpayers to inform the foreign jurisdiction as soon as possible that
they are persuing an APA. Some treaty partners prefer to be involved throughout the APA
process. Others would rather review the agreement reached by the IRS and the taxpayer.
Generally, the IRS prefers to execute the APA and then submit it to the foreign competent
authority as the United States position paper. Based upon the APA the United States and
foreign competent authority will negotiate a mutual agreement.
Based upon recent experience, taxpayers and the IRS typically reach agreement
on the essential issues within nine months of the date the IRS receives a taxpayer's APA
submission. Agreements are generally signed within twelve months from submission.
The average term of an APA is three taxable year. Although taxpayers may
negotiate for any appropriate term, the IRS prefers a term of sufficient length to justify
the time and expense required to arrive at an agreement.
In the course of developing an APA, a taxpayer must provide the IRS with
proprietary information that it considers extremely confidential. Such information is
protected from disclosure by Section 6103 of the Internal Revenue Code, as is the APA
The IRS promised that as it developed APA experience with various taxpayers in
a particular industry, it would publish a notice describing in general terms the methods
and factors used to allocate income. Notice 94-40 (1994-17 I.R.B.) is the first of these
notices. It summarizes the IRS experience with issuing APAs to taxpayers with global
trading operations. The IRS expects that such descriptions- while not disclosing
confidential information- will enable other taxpayers with similar issues to complete
their APAs more quickly.
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