A bilateral advance pricing agreement (BAPA) is a mutual agreement between two tax administrations to resolve transfer pricing disputes involving cross-border transactions between associated enterprises. This agreement is designed to provide certainty and clarity in determining the arms` length price for transactions between related parties, which can be a complex and contentious issue that often leads to disputes.
Under a BAPA, the tax authorities of both countries enter into negotiations with the aim of reaching an agreement on the pricing of cross-border transactions between related parties. This involves an analysis of the functions, assets, and risks of each party involved in the transaction, as well as an assessment of the comparability of the transaction with similar transactions that have taken place between unrelated parties.
Once a mutual agreement is reached, the BAPA is legally binding on the tax authorities of both countries and the taxpayer. This provides certainty and stability for the taxpayer, as they can rely on the agreed-upon pricing for the duration of the agreement, which typically ranges from three to five years.
BAPAs are beneficial for both taxpayers and tax authorities. For taxpayers, they provide certainty and clarity in determining the transfer pricing for cross-border transactions, reducing the risk of costly and time-consuming disputes with tax authorities. For tax authorities, BAPAs provide a mechanism for resolving transfer pricing issues in a cooperative and mutually beneficial manner, while also promoting consistency in the application of transfer pricing rules across different jurisdictions.
BAPAs are also a useful tool in reducing double taxation, which occurs when the same income is taxed twice in different jurisdictions. By agreeing on the pricing of cross-border transactions, BAPAs help to ensure that income is appropriately allocated between the parties involved in the transaction, reducing the risk of double taxation.
In conclusion, a bilateral advance pricing agreement is an important tool for resolving transfer pricing disputes involving cross-border transactions between related parties. They provide certainty and clarity for taxpayers, while also promoting cooperation and consistency in the application of transfer pricing rules across different jurisdictions. By reducing the risk of disputes and double taxation, BAPAs are an effective way to support international trade and investment.