Are companies are turning away from Advance Pricing Agreements to manage their transfer pricing risks?

Guy Sanschagrin, writing in Bloomberg BNA’s Transfer Pricing International Journal, suggests that companies suffering through the long and expensive process of getting an Advance Pricing Agreement (APA) from the IRS will not repeat the process.

The IRS’ APA program is theoretically designed to help companies with their transfer pricing exposures, almost like a private letter ruling would in a domestic income tax situation. (Most APAs involve US taxpayers and the U.S. Internal Revenue Service (IRS), but APAs are also made outside the United States.) An APA is an agreement on the appropriate transfer pricing methodology, allowing for the transfer of goods, services and use of property between related parties. OECD Transfer Pricing Guidelines state, “Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions.”

"Companies are finding that the APA benefits do not outweigh the costs and resources the APA process requires," says Sanschagrin. The good news is that companies can substitute robust documentation in lieu of an APA to manage their transfer pricing risks. Such documentation would delineate and prove the nature and ownership of intangibles and explore multiple transfer pricing methods. Licenses and royalty rates found in ktMINE are used extensively in the transfer pricing community to document like third-party transactions.