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Simple English definitions for legal terms
bilateral advance pricing agreement
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A quick definition of bilateral advance pricing agreement:
A bilateral advance pricing agreement is a legal agreement between a multinational company and one or more national tax authorities. The agreement determines the method the company will use to calculate transfer prices, with the aim of reducing or eliminating double taxation. This agreement is abbreviated as APA and is binding. A multilateral advance pricing agreement is made between a company and more than two tax authorities, while a unilateral advance pricing agreement is made between a company and one tax authority. However, a tax authority that is not a party to the agreement is not bound by the transfer-pricing method specified in the agreement.
A more thorough explanation:
A bilateral advance pricing agreement is a binding arrangement made between a multinational company and one or more national tax authorities. The purpose of this agreement is to determine the method that the company will use to calculate transfer prices, with the aim of reducing or eliminating double taxation.
For example, if a company has operations in two countries, it may enter into a bilateral advance pricing agreement with the tax authorities in both countries. This agreement would specify the transfer pricing method that the company will use when moving goods or services between the two countries. By doing so, the company can avoid being taxed twice on the same income.
It is important to note that a bilateral advance pricing agreement only applies to the tax authorities that are party to the agreement. If a company has operations in multiple countries, it may need to enter into separate agreements with each country's tax authority to avoid double taxation.