In general, a bilateral APA is a binding agreement between two tax administrations and the taxpayers concerned. This is concluded with reference to the corresponding double taxation convention. It regulates the tax treatment of future transactions between related taxpayers. As a result of growing government deficits, many jurisdictions are putting additional pressure on transfer pricing in order to get a larger share of corporate profits for their tax base. This can lead to the risk of tax assessments, double taxation of the same income by two countries, and penalties for incorrect distribution of income between two or more countries and territories. As a result, virtually all large multinational enterprises should regularly review their international transfer pricing strategies and potential risks. The Internal Revenue Code imposes penalties when a taxpayer receives a transfer pricing adjustment from the IRS that exceeds certain thresholds. However, the penalties do not apply if the taxpayer has prepared and documented an appropriate transfer pricing analysis that supports its reported transfer pricing. The Regulations of Article 482 provide for several methods for verifying whether a price complies with the arm`s length measure, but do not provide for strict priority of methods., None method is invariably considered more reliable than another.
Instead, each transaction reviewed under section 482 must be valued using the method that provides the most reliable measure of an arm`s length outcome (i.e., the “best method”) in the circumstances. Under paragraph 6662(e), the transfer pricing penalty is generally 20% of the insufficient payment of the tax due to the misrepresentation of transfer prices, but it increases to 40% of the underpayment of the tax for major adjustments. Simultaneous transfer pricing documentation that meets the requirements of paragraph 6662(e) can help provide protection against these penalties at the time of filing the tax return. Transfer pricing is a term used to describe intercompany pricing agreements related to transactions between affiliates. This may include transfers of intangibles, tangible goods or services, as well as loans or other financing transactions that may take place across local, state or international borders. The provisions of Article 482 recognise that a method is likely to lead to a number of arm`s length results and provide that a taxpayer shall not be subject to an adjustment if the taxpayer`s performance is in such an arm`s length range. The arm`s length range is generally determined by applying a single pricing method selected according to the best method rule on two or more uncontrolled transactions with similar comparability and reliability. Transfer pricing applies to a wide range of intercompany transactions, including transactions that include: The international standard for determining fair transfer pricing is the arm`s length principle. According to that principle, transactions between two related parties should produce results which are no different from those which would have resulted from similar transactions between independent undertakings in similar circumstances. This principle is cited in the United States Transfer Pricing Rules (Section 482 of the Treasury Department Code and Regulations contained therein), the Transfer Pricing Guidelines and the United Nations Transfer Pricing Manual for Developing Countries. Some countries (for example. B Brazil) do not adhere to the international application of the arm`s length principle.
The section 482 regulations are broad and are intended to process a full range of transactions in light of the arm`s length standard. In practice, however, it is not easy to determine the appropriate arm`s length outcome on the basis of a given set of facts and circumstances. Transactions involving goods and services may contain unique, business- or industry-specific elements that are difficult to compare to transactions involving other businesses. Section 482 regulations recognize the scarcity of identical transactions and instead attempt to determine arm`s length outcomes based on the “best method” rule. In order to determine the best method for a given transaction, it is necessary to assess the relative reliability of a method on the basis of the degree of comparability between the audited transaction or taxpayers and the uncontrolled benchmarks applied under the method, taking into account certain factors. .