In the current global economic environment tax authorities are increasing their transfer pricing audit activities to ensure that they are staking their claim to taxable profits—and the amounts of tax at stake can be material. To mitigate this risk, many companies are opting to enter formal Advance Pricing Arrangements (APAs) with one or more tax authorities.

A new survey released Monday by KPMG International, titled "Navigating APAs," shows that respondents believe the benefits of an APA outweigh the costs. The stability and security of knowing how their transfer pricing will be treated clearly offsets the concerns about the time and expense involved in pursuing an APA.

Through an APA respondents also indicated they are better able to manage internal resources and save time and costs by preventing future audits.

“APAs offer security that the tax authorities will accept your transfer pricing methodology over the term of the agreement,” says Sean Foley, KPMG’s Head of Global Transfer Pricing Services.

“To ensure APA programs keep attracting companies that want the security of an APA at a reasonable cost and speed, the introduction of a simplified, expedited and risk-based process will be critical.”

According to the survey, with more control over the timing of the APA process compared to an audit, respondents were better able to manage their workflows and internal resources.

Some respondents saw value in the opportunity to improve their relationships with the tax authorities and to help them understand their business model over the course of the negotiations.

Successful APAs can also serve as precedents to support the company’s transfer pricing in other jurisdictions.

“Over the past 20 years, APAs have become well-established tools for risk management and advance compliance,” says François Vincent, KPMG’s Leader, Global Transfer Pricing Dispute Resolution. “Experience shows that once a company goes through the process and sees the benefits, many will do it again – albeit the right situation.”