Advance Transfer Pricing Agreements: Definition, Benefits, and Regulation

November 29, 2024

Definition of Advance Pricing Agreements

Advance Pricing Agreements (APAs) are formal arrangements between a company and the tax authorities that establish rules to determine the transfer prices of related party transactions. It mainly aims to ensure that these transactions comply with the Arm’s Length Principle, thus avoiding tax disputes and providing tax certainty to companies.

Procedures

There are different APA procedures, depending on the number of the parties involved:

  1. Unilateral:
    • The company and the tax authority exclusively agree on these agreements.
    • They are useful for companies operating in jurisdictions where their operations do not affect other countries.
    • Conversely, they may generate double taxation risks if other jurisdictions do not recognize the agreement.
  2. Bilateral:
    • They include the tax authorities of two countries, in addition to the applicant company.
    • They are useful for transactions between subsidiaries or affiliates in different countries, given that they ensure tax consistency in both jurisdictions.
  3. Multilateral:
    • It involves the company and more than two tax authorities.
    • They are the most complex but also the most complete due to the comprehensive solutions offered for global operations.

Each procedure has its benefits and limitations, depending on the characteristics and tax objectives of the company.

APAs Benefits

  1. Tax certainty: They avoid unexpected adjustments and Transfer Pricing penalties.
  2. Avoidance of disputes: They reduce tax audits and disputes with tax authorities.
  3. International alignment: They ensure compliance with the OECD guidelines and double taxation agreements.
  4. Reduction of double taxation risks: Especially in bilateral and multilateral APAs.

Countries Regulating Advance Pricing Agreements

In Latin America, Europe, and the United States, several jurisdictions have implemented legal frameworks to apply APAs, strengthening tax transparency and international cooperation. The countries regulating APAs are highlighted below:

Country Are there regulations for PACs? Observation
Argentina Yes Regulations in the Income Tax Law and AFIP resolutions.
Bolivia No APAs are not explicitly regulated; general Transfer Pricing rules.
Brazil Yes Based on Law 9430/1996 on Transfer Pricing.
Chile Yes Regulated by resolutions of the SII (Servicio de Impuestos Internos – Internal Revenue Service), such as No. 68 and No. 54.
Colombia Yes Included in the Tax Statute and DIAN regulations.
Costa Rica Yes Regulated in Decree No. 37898-H on Transfer Pricing.
Ecuador Yes Covered by the Internal Tax Regime Law and IRS resolutions.
El Salvador No No specific regulation for APAs; general Transfer Pricing regulations apply.
Spain Yes Regulation included in the Corporate Income Tax Regulations.
The United States Yes Managed under the IRS program, based on Section 482 of the Internal Revenue Code.
Guatemala No The regulation is limited to Transfer Pricing but does not cover APAs.
Honduras No Transfer Pricing Law does not include formal mechanisms for APAs.
Mexico Yes Federal Tax Code, Article 34-A, regulates APAs.
Nicaragua No No specific provisions for APAs in Law No. 822.
Panama Yes Regulations in Executive Decree No. 390 on Transfer Pricing.
Paraguay No Resolution No. 85/2021 regulates Transfer Pricing but not APAs.
Peru Yes Included in the Income Tax Law and SUNAT provisions.
The Dominican Republic No The Tax Code does not formally contemplate APAs.
Uruguay Yes Regulated under Decree No. 353/018, which complements Law No. 19,484.
Venezuela No General Transfer Pricing rules, but no specific APAs.

Relationship of APAs with the OECD

The Organisation for Economic Cooperation and Development (OECD) establishes international Transfer Pricing guidelines, encouraging the use of APAs against double taxation and tax disputes. The aforementioned jurisdictions have implemented these recommendations to promote a fair and transparent tax environment.