Transfer Pricing

1
Transfer Pricing

• Advance Pricing Agreements
• Bob Ackerman
• John Michaelson

2
Transfer Pricing Disputes

• Factually intensive
• Frequently contentious and controversial
• Time consuming
• Adversarial
• Arbitrary resolutions
• Expensive from both taxpayers and taxing
  authoritys perspective

3
Advance Pricing
Agreements (APAs)
Solution
4
Overview of APAs

• What is an APA?
• Advantages/Disadvantages of an APA?
• How does the APA process work?

5
What is an APA

• A non-adversarial and efficient process through
  which a taxpayer can enhance the predictability
  of the tax treatment of its intercompany
  transactions.

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What is an APA (cont.)

• 1. To arrive at an understanding on three basic
  issues
• the factual nature of the intercompany
  transactions to which the APA applies
• an appropriate transfer pricing method (TPM)
  applicable to those transactions
• the expected range of results from applying the
  TPM to the transactions
• 2. To do so in an environment that encourages
  common understanding and cooperation

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What is an APA (cont.)

• 3. To come to an agreement in an expedited
  fashion
• 4. To come to an agreement in a cost
  effective fashion

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APAs Potential Advantages

• Avoids protracted disputes
• Educates taxing authorities
• Offers flexibility
• Is an efficient use of resources (application to
  back years)
• Provides certainty
• Eliminates the risk of double taxation

9
APAs Potential Disadvantages

• Locked into TPM
• Disclosure to government of sensitive data
• Raises other issues

10
How does the APA Process Work

• Prefiling conference
• APA proposal
• Evaluation and negotiation process
• The agreement
• Administration
• Renewal

11
APA Prefiling Conference

• Scope of agreement
• TPM
• Duration of agreement
• Rough format
• Soft data
• Prior year exam status

12
APA Proposal

• General facts
• TPM
• Specific facts and circumstances relevant to TPM
• Legal discussions
• Critical assumptions
• Annual report information
• Term of agreement

13
Negotiations

• On-site visits
• Additional data requests
• Conferences
• Clarification of facts
• Negotiation of settlement
• Contract drafting

14
The Agreement

• Parties
• Covered transactions
• TPM
• Term
• APA records
• Critical assumptions
• Compensating adjustments
• Annual report

15
Administration

• Annual reports
• Good faith compliance
• Future examinations
• Accurate, valid facts
• Correct computations
• Consistent application

16
Renewal

• Same facts
• Expedited
• Abbreviated APA proposal
• Different facts - just depends

17
Future State Participation in APAs

• Joint Federal/State APA Program
• Simultaneous resolution of Federal and State
  transfer pricing issues

18
Future State Participation in APAs State
Benefits

• Training on how to conduct Advance Pricing
  Agreement negotiations
• Knowledge of How to Conduct an APA Investigation
• Intimate Knowlege of Select Industries
• Detailed Knowledge of Particular Taxpayers

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Future State Participation in APAs Taxpayer
Benefits

• Cost Effective Way of Resolving Transfer Pricing
  Issues
• Certainty of Tax Treatment
• Simultaneous Resolution of Similar Federal and
  State Issues

19
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Future State Participation in APAs Federal
Benefits

• Increased Awareness of Federal APA Program.
• Increased Cooperation with State taxing
  Authorities.

20
21
Future State Participation in APAs State
Concerns

• Increased Manpower and Infrastructure Support
• Privacy Concerns
• Federal Influence over State Taxing Decisions
• State involvement with Federal Negotiations

21
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Conclusion

• Flexible common sense approach
• Consensus seeking
• Effective problem solving tool
• Avoids audits
• Provides certainty
• Reduces taxpayer burden
• Cost-effective