When a tax authority determines that a transfer price is not arm’s length, it issues adjustments that can trigger international tax disputes.
Primary and Corresponding Adjustments
  • Primary Adjustment: Tax Authority A audits Subsidiary A and determines it underpriced its sales to Subsidiary B. Tax Authority A increases Subsidiary A’s taxable income and issues a tax demand.
  • Corresponding Adjustment: To prevent economic double taxation, Tax Authority B (where Subsidiary B resides) must provide a reciprocal reduction in Subsidiary B’s taxable income. This coordinate adjustment process is handled via the Mutual Agreement Procedure (MAP) embedded in tax treaties.

Advance Pricing Agreements (APAs)
An APA is a prospective agreement between a taxpayer and a tax authority (or multiple tax authorities) that fixes the transfer pricing methodology, sets of comparables, and critical assumptions for a specified set of controlled transactions over a future period (usually 3 to 5 years).
  • Unilateral APA: Between the taxpayer and the local tax authority only.
  • Bilateral/Multilateral APA: Involves the taxpayer, the local tax authority, and one or more foreign revenue bodies, offering complete protection against future audits and double taxation for those specific transactions.

 
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