Advance Pricing Agreement in Simple Terms

As a business owner, you know how important it is to plan ahead and budget for expenses. Unfortunately, when it comes to taxes, that can be easier said than done. The rules surrounding tax calculations can be complex, making it hard to know how much you`ll owe each year.

That`s where an advance pricing agreement (APA) comes in. An APA is a deal made between a taxpayer and the Internal Revenue Service (IRS) that sets out a method for determining transfer prices. A transfer price is the value placed on goods or services that a company sells or transfers to its related party or affiliate, such as a subsidiary, branch, or joint venture.

In other words, an APA helps businesses avoid transfer pricing disputes—when the IRS believes that a company`s transfer prices do not reflect the market value—and provides a clear set of rules for calculating taxes. By agreeing on a method for determining transfer prices in advance, businesses can avoid costly audits, penalties, and legal battles.

Types of APAs

There are three types of APAs: unilateral, bilateral, and multilateral.

Unilateral APAs are agreements between a taxpayer and the IRS. They are used when one country has jurisdiction over a transaction.

Bilateral APAs are agreements between two tax authorities, such as the IRS and a foreign government. They are used when a transaction involves two or more countries.

Multilateral APAs are agreements between three or more tax authorities. They are used when transactions involve multiple countries.

The process of obtaining an APA

Obtaining an APA can be a lengthy and complicated process. It typically involves the following steps:

1. Pre-filing consultation. Before submitting an APA request, a taxpayer can have a pre-filing consultation with the IRS to discuss the case and determine if an APA is appropriate.

2. APA request. The taxpayer submits an APA request that includes a description of the covered transactions, the proposed transfer pricing methodology, and any other relevant information.

3. APA review. The IRS reviews the APA request and may request additional information or clarification.

4. Negotiation. The IRS and the taxpayer negotiate the terms of the APA and work out any differences.

5. Agreement. Once the parties agree on the terms of the APA, they sign the agreement, and the APA takes effect.


Obtaining an APA can be a valuable tool for businesses that engage in cross-border transactions or have related-party transactions. By providing a clear set of rules for calculating taxes, an APA can help businesses avoid costly legal battles and audits. While the process of obtaining an APA can be complicated, it can be well worth the effort for businesses that want to avoid transfer pricing disputes and ensure they are paying the correct amount of taxes.