Meaning
Administrative contracts between two sovereign tax jurisdictions and a multinational entity establish fixed transfer pricing methodologies for a specified set of future years. These bilateral advance pricing agreements prevent double taxation by ensuring that both countries agree on the pricing of intercompany transactions before they occur. The process involves extensive negotiations between the competent authorities of the involved nations.
A contract stops applying if the underlying economic conditions or the business model of the taxpayer changes.
Mutual Agreement
The resolution of the pricing methodology is reached through a formal mutual agreement procedure between the two states. This collaboration removes the risk of a unilateral audit by one country that would lead to a tax adjustment in the other.
Procedural Duration
Reaching a final settlement often takes several years due to the complexity of the functional analysis and the need for consensus between different national tax offices. During this time, the taxpayer must provide detailed financial projections and historical data to support the proposed pricing method.
Judicial Security
Once signed, the agreement provides certainty regarding the tax treatment of the covered transactions. This protection allows the company to plan its global cash flows without the fear of unforeseen tax assessments or litigation in either jurisdiction.
