APAs thriving in a period of global transfer pricing uncertainty

Tax Hot Topics newsletterThe IRS released the 2018 Advance Pricing Agreement (APA) report in March, and it bears good news.

The report indicates that uncertainty regarding global transfer pricing enforcement, fueled by BEPS-driven reporting requirements and U.S. tax reform changes, has encouraged multinational enterprises to seek APAs in record numbers. Further, the U.S. Advance Pricing and Mutual Agreement (APMA) program continues to close nearly the same number of APAs as previous years.

The number of U.S. APA requests more than doubled, rising from 101 requests in 2017 to 203 in 2018. Some of this increase can be attributed to taxpayers accelerating their filing of requests to avoid a U.S. APA user fee increase from $60,000 before July 2018 to $113,500 after Dec. 31, 2018. However, initial taxpayer interest in APAs is best explained by taxpayer interest in certainty in response to global enforcement changes.

APMA closed 107 APAs in 2018, down slightly from 116 closed in 2017. This outcome was likely affected by the government shutdown at the end of 2018, but a reduction in case-working personnel at APMA may have also been a factor. Team leaders have declined from 62 in 2016 to 56 in 2018; economists have declined from 20 in 2016 to 12 in 2018. Thus, the relatively small decrease in APA closings is not a great cause for concern, but with IRS hiring on the rise, particularly in the International division, APMA should receive resources to maintain its staffing levels to work APAs.

APMA executed 39% of its bilateral APAs with Japan, down from 57% in 2017. Canada is APMA’s second highest treaty partner with 20% of the programs APAs executed in 2018, compared with 16% in 2017. Korea is third, with 10% in 2018 and 9% in 2017.

Over 20% of the APAs executed in 2018 involved the use of intangible property. APMA appears to want to increase that number, particularly in bilateral settings, stating that the program is seeking opportunities to work with taxpayers to provide prospective certainty in cases involving the use of intangible property.

Overall, these statistics indicate that APAs are still desirable to multinational taxpayers, especially Japan-based multinationals. Although APMA’s workload is increasing, its case-working headcount is decreasing. The slight decline in 2018 case closures may be anomaly. That figure could return to normal without the disruption of a government shutdown and with increased APMA staffing.

David Sites
Partner, Washington National Tax Office
T +1 202 861 4104

Steven Wrappe
Managing Director
Washington National Tax Office
T +1 202 521 1542

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