Abstract
Obtaining a preliminary approval from its tax authority as to its mehodologies of transfer pricing would provide taxpayers with a safe harbor. This preliminary measure provides positive assurance against unexpected income allocation adjustments made by the tax authority. Such a procedure is commonly referred to as an “Advance Pricing Agreement(APA).”
In order to be an effective income allocation method, an APA must be an either binational or multinational. Only binational or multinational APA could supplement the judicial, administrative, and treaty mechanisms for resolving transfer pricing issues related to income allocation when the traditional methods fails or are difficult to apply.
The binational APA negates the need to obtain APAs from two tax authorities and reduces the possibility of lengthy competent authority audits and negotiation. Thus, the binational APA can decreases burdens on both the taxpayers and tax authorities, and also helps avoid the risk of double taxation.
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