Understanding Unilateral Advance Pricing Agreement: A Comprehensive Guide
Definition & meaning
A unilateral advance pricing agreement (APA) is a formal arrangement between a company and a single tax authority regarding the pricing of transactions between related entities. This agreement establishes a method for determining transfer prices to ensure compliance with tax regulations. However, it does not guarantee the avoidance of double taxation, as it is only binding for the parties involved and does not affect other tax authorities that may have jurisdiction over the same transactions.
Legal use & context
Unilateral advance pricing agreements are primarily used in international tax law, especially for multinational corporations. They help companies establish predictable tax outcomes and reduce the risk of disputes with tax authorities over transfer pricing. Users can manage aspects of this process with the right legal tools, such as templates available through US Legal Forms, which can simplify the preparation of necessary documentation.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A U.S.-based technology company enters into a unilateral APA with the Internal Revenue Service (IRS) to set the price for software licenses sold to its foreign subsidiary. This agreement outlines the acceptable pricing method but does not prevent other countries from imposing their own tax assessments on the same transactions.
Example 2: A hypothetical example could involve a manufacturing firm that negotiates a unilateral APA with a state tax authority to clarify transfer pricing for raw materials sourced from a related entity abroad. This agreement would help the firm understand its tax obligations in that state while not affecting its obligations in other jurisdictions.