On December 13, 2019, the United States (U.S.) and China put in place a framework for a formalized agreement A pre-price agreement (APA) is a pre-agreement between a subject and a tax authority on an appropriate transfer pricing methodology (TPM) for a set of fixed-term management measures (“secure transactions”). On February 26, 2019, the U.S. Advance Pricing and Mutual Agreement Program (APMA) released an Excel-based financial model that intends to use the program to review certain applications from the Advance Pricing Agreement (APA). The stated objective of the model is to enable the Internal Revenue Service (IRS) to “better understand the contributions of controlled taxpayers to proposed secure transactions, including the respective contributions of each subject controlled to the exercise of the significant economic risks associated with proposed secure transactions.” 1 To this end, the Functional Cost Diagnostic Model (FCD MODEL) records, identifies, organizes and analyzes the costs incurred by each controlled subject for covered transactions. A fraction of the loss is then calculated. APMA compares the results of the pro forma profit portion to the results obtained under the proposed transfer pricing method at the taxpayer`s request. APMA assures taxpayers that they will only use the CDF model for diagnostic purposes in limited circumstances, and its application does not mean that the sharing of remaining benefits is necessarily the “most appropriate method” for covered transactions, in accordance with Organisation for Economic Co-operation and Development (OECD) guidelines. However, it is possible that a subject may be able to negotiate a unilateral APA involving only the taxpayer and the IRS. In this case, both parties negotiate an appropriate TPM only for U.S. tax purposes.
If the taxpayer is involved in a dispute with a foreign tax authority over the registered transactions, he can apply for a discharge by asking the competent US authority to initiate a procedure of mutual agreement. This, of course, implies the entry into force of an applicable foreign income tax agreement. The APA programme proposes a voluntary process of settlement in principle and cooperation of real or potential transfer pricing disputes as an alternative to the traditional review procedure. The 2015-41 revenue procedure requires an APP submission to contain important financial information to facilitate analysis of the duration of consideration paid or received by APMA. Requirements include: (i) the estimated dollar value of the transactions covered during the proposed APA years; (ii) the synthesis of the methods covered (by transaction), including the proposed interquaartile range, the profit and loss account and the balance sheet of the comparable transaction; (iii) proof of the proposed transfer pricing method for covered transactions; and (iv) the application of the APA`s financial model (profit and loss account and balance sheet) to the controlled party, etc. IRS officials announced a reorganization of the Advance Pricing and Mutual Agreement Program (APMA), which handles tax claims and advance pricing agreements (PAAs) and transfer pricing assistance and related litigation through Mutual Agreement Procedures (MAP). This step will consolidate APMA`s resources in a way designed to improve internal processes, resolve disputes and increase taxpayer service. The U.S.
IRS issued a statement on the reorganization of the Appeal Agreement and Voluntary Agreement Program to improve internal processes, resolve disputes and increase taxpayer service.