A revenue procedure advance pricing agreement (APA) is an agreement between the Internal Revenue Service (IRS) and a taxpayer which aims to resolve transfer pricing disputes. Transfer pricing refers to the pricing of goods, services, and intellectual property transferred between entities within the same multinational enterprise.
In essence, a revenue procedure APA is an agreement between the taxpayer and the IRS which outlines how transfer pricing will be handled for a specific set of transactions. The APA sets out the agreed upon transfer pricing methodology for a specific period of time (usually between 3 and 5 years), which provides certainty to the taxpayer regarding the tax implications of their inter-company transactions.
The revenue procedure APA process is initiated by the taxpayer, who submits an APA request to the IRS. The request includes information on the taxpayer`s business, the inter-company transactions in question, and proposed transfer pricing methodologies. The IRS then reviews the request, and if the proposed methodology is deemed reasonable, the parties can enter into negotiations to finalize the terms of the APA.
Once the APA is finalized, the taxpayer is required to comply with the agreed upon transfer pricing methodology for the duration of the APA period. In exchange, the taxpayer receives certainty regarding their tax liabilities for the covered transactions, as long as they comply with the agreed upon methodology.
There are several benefits of entering into a revenue procedure APA. First and foremost, it provides certainty to the taxpayer, reducing the risk of future transfer pricing disputes with the IRS. Additionally, it can potentially reduce the amount of time and resources that the taxpayer would have to devote to transfer pricing compliance and dispute resolution. This can be particularly beneficial for multinational enterprises with complex inter-company transactions.
To conclude, a revenue procedure APA is an agreement between the IRS and a taxpayer which provides certainty regarding the tax implications of inter-company transactions for a specific period of time. The process involves the submission of an APA request by the taxpayer, negotiations between the parties, and compliance with the agreed upon transfer pricing methodology. The benefits of entering into a revenue procedure APA include reduced risk of future disputes and potentially reduced compliance costs.