Advance pricing is a pricing agreement negotiated before a working relationship begins, commonly used in commercial and tax contracts. It can involve penalties for not meeting minimum business volumes, and there are two types: bilateral and unilateral.
Advance pricing is a type of pricing agreement between two parties that is negotiated and agreed upon at some point prior to the actual commencement of a working relationship between the two parties. In the United States, upfront pricing is often associated with what is known as an upfront pricing agreement (APA), a financial agreement between the Internal Revenue Service and a taxpayer. The terms associated with the price are considered binding on both parties, provided that neither party breaches the provisions found in the contract.
As part of a general commercial contract, upfront pricing generally refers to the custom or discount price that is extended to a customer at the beginning of the contract period. The price is normally extended with the understanding that the customer will generate a specified minimum volume of business with the supplier over the course of the contract. In the event that the contract period ends and the customer does not generate this minimum amount of turnover, the supplier may exercise provisions in the contract to assess a penalty that actually offsets the discount on goods and services received during the contract term. . agreement. Although this type of advance pricing contract normally includes this type of provision, the execution of the provision is up to the supplier, who can choose to waive the penalty if the customer is willing to enter into a new contract or transfer the old contract to another term.
The concept of advance pricing is also common in structuring and remitting tax payments. With this approach, the tax agency and the taxpayer will come to an agreement on what is known as a transfer pricing methodology. This is simply scheduling and formatting a series of payments to the tax agency over a specified period as a way to manage the projected tax debt. When an advance pricing contract is established between the taxpayer and the tax agency, the terms of the contract are considered legally binding. Contract provisions typically prevent the tax agency from seeking any type of price adjustment for any transaction covered under the contract, provided the taxpayer files returns and manages the covered transactions in a manner that is in compliance with the terms of that agreement. .
There are actually two different types of deals that involve upfront pricing. Bilateral APA involves the taxpayer working with more than one tax agency and is especially useful for companies that operate in several different countries. This is because the terms of the contract help to avoid the incidence of double taxation on the revenues produced. A unilateral advance pricing agreement is usually between a taxpayer and a single tax agency, and the terms of that agreement are not binding on any business operations the company may have outside the jurisdiction of the agency that forms part of the APA.
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