Transfer Pricing

1. Transfer Pricing Advance Pricing Agreements Bob Ackerman John Michaelson

2. Transfer Pricing Disputes • Factually intensive • Frequently contentious and controversial • Time consuming • Adversarial • Arbitrary resolutions • Expensive from both taxpayer’s and taxing authority’s perspective

3. Advance Pricing Agreements (APAs) Solution

4. Overview of APAs • What is an APA? • Advantages/Disadvantages of an APA? • How does the APA process work?

5. What is an APA • A non-adversarial and efficient process through which a taxpayer can enhance the predictability of the tax treatment of its intercompany transactions.

6. What is an APA (cont.) 1. To arrive at an understanding on three basic issues • the factual nature of the intercompany transactions to which the APA applies • an appropriate transfer pricing method (TPM) applicable to those transactions • the expected range of results from applying the TPM to the transactions 2. To do so in an environment that encourages common understanding and cooperation

7. What is an APA (cont.) 3. To come to an agreement in an expedited fashion 4. To come to an agreement in a cost effective fashion

8. APAs: Potential Advantages • Avoids protracted disputes • Educates taxing authorities • Offers flexibility • Is an efficient use of resources (application to back years) • Provides certainty • Eliminates the risk of double taxation

9. APAs: Potential Disadvantages • Locked into TPM • Disclosure to government of sensitive data • Raises other issues

10. How does the APA Process Work • Prefiling conference • APA proposal • Evaluation and negotiation process • The agreement • Administration • Renewal

11. APA Prefiling Conference • Scope of agreement • TPM • Duration of agreement • Rough format • “Soft” data • Prior year exam status

12. APA Proposal • General facts • TPM • Specific facts and circumstances relevant to TPM • Legal discussions • Critical assumptions • Annual report information • Term of agreement

13. Negotiations • On-site visits • Additional data requests • Conferences • Clarification of facts • Negotiation of settlement • Contract drafting

14. The Agreement • Parties • Covered transactions • TPM • Term • APA records • Critical assumptions • Compensating adjustments • Annual report

15. Administration • Annual reports • Good faith compliance • Future examinations • Accurate, valid facts • Correct computations • Consistent application

16. Renewal • Same facts • Expedited • Abbreviated APA proposal • Different facts - just depends

17. Future State Participation in APAs • Joint Federal/State APA Program • Simultaneous resolution of Federal and State transfer pricing issues

18. Future State Participation in APAs: State Benefits • Training on how to conduct Advance Pricing Agreement negotiations • Knowledge of How to Conduct an APA Investigation • Intimate Knowlege of Select Industries • Detailed Knowledge of Particular Taxpayers 18

19. Future State Participation in APAs: Taxpayer Benefits • Cost Effective Way of Resolving Transfer Pricing Issues • Certainty of Tax Treatment • Simultaneous Resolution of Similar Federal and State Issues 19

20. Future State Participation in APAs: Federal Benefits • Increased Awareness of Federal APA Program. • Increased Cooperation with State taxing Authorities. 20

21. Future State Participation in APAs: State Concerns • Increased Manpower and Infrastructure Support • Privacy Concerns • Federal Influence over State Taxing Decisions • State involvement with Federal Negotiations 21

22. Conclusion • Flexible & common sense approach • Consensus seeking • Effective problem solving tool • Avoids audits • Provides certainty • Reduces taxpayer burden • Cost-effective