Question

A binding contract between the IRS and the taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return for a covered year consistent with the agreed transfer pricing method is called a(n):

1) Advance Pricing Agreement
2) Transfer Pricing Agreement
3) Tax Treaty
4) Safe Harbor

Answer 1

The contract described is an Advance Pricing Agreement (APA), which is an agreement between a taxpayer and the IRS that sets transfer pricing methods for certain transactions to prevent future adjustments, as long as the taxpayer complies with the terms of the agreement.

Step-by-step explanation:

The binding contract between the IRS and the taxpayer that you're referring to is called an Advance Pricing

Agreement (APA). An APA is a proactive agreement between a taxpayer and the IRS that determines an appropriate set of criteria for the determination of the transfer pricing for certain transactions over a fixed period of time.

This ensures that the IRS will not seek a transfer pricing adjustment as long as the taxpayer files its return adhering to the agreed transfer pricing method for the transactions covered by the APA.