Academic journal article Journal of Accountancy

Advance Pricing Agreements for SMEs

Academic journal article Journal of Accountancy

Advance Pricing Agreements for SMEs

Article excerpt

In today's global economy, small and medium-size enterprises (SMEs) compete not only to make sales but to employ labor, consume raw materials, and obtain low-cost capital. SMEs now comprise some 97% of all U.S. exporters and produce almost one-third of all goods and services exported. But whenever companies cross borders and deal with controlled affiliates, tax collectors follow. And foremost among tax collectors' concerns is the matter of intercompany pricing--that is, assuring that prices charged among related corporations are determined at arm's length.

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Arm's-length pricing (ALP) of transactions between controlled affiliates is a statutory prerequisite for proper tax compliance in the United States. A failure to comply can result in a penalty of 20% or even 40% of the tax in the United States (IRC [section] 6662). Advance pricing agreements with the IRS can help businesses that have transactions with controlled affiliates to minimize their exposure to intercompany pricing adjustments on audit and avoid penalties.

ADVANCE PRICING AGREEMENTS

An advance pricing agreement (APA) is an agreement between a taxpayer and the IRS to determine the best transfer pricing method to use for controlled transactions (under IRC [section] 482). Generally the agreement describes the controlled transaction, the APA term, assumptions, records that must be maintained, and reporting responsibilities. But APAs can also provide "a process whereby the Service and taxpayers may resolve other issues arising under certain income tax treaties, the Code or the ... Regulations, for which transfer pricing principles may be relevant" (Revenue Procedure 2008-31). Thus, according to the IILS, the APA process can help resolve whether income is effectively connected to a U.S. trade or business and determine amounts of income derived from sources partly within and partly outside the United States (Revenue Procedure 2008-31). These additional aspects of APAs can be particularly helpful when a company is considering moving operations overseas, participating in a joint venture, or considering check-the-box plans. …

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