Global View: The IRS Updates The Advance Pricing Agreement Procedures

Determining the arm's length transfer price of intercompany transactions has created some of the most resource consuming controversies in taxation and may result in a transfer pricing penalty.  To avoid a transfer pricing penalty, a taxpayer must prepare contemporaneous documentation that shows the arm's length pricing of intercompany transactions.¹  To avoid both a transfer pricing penalty and an adjustment, a taxpayer may enter an advance pricing agreement (APA) with the IRS (and possibly the other country's taxing authority).

Pursuant to the APA procedure, the IRS reviews and agrees to the taxpayer's transfer pricing method before the taxpayer implements the method.  An APA spells out the factual nature of the related party transaction and an appropriate pricing method.  Assuming that the taxpayer properly applies the agreed-upon method to the transaction, the IRS will not audit the issue.