2019 APA report shows business as usual

Tax Hot Topics newsletter The IRS released the 2019 Advance Pricing Agreement (APA) program report on April 6 indicating that the U.S. Advance Pricing and Mutual Agreement (APMA) program remains a robust forum for resolving transfer pricing issues.

APMA closed 120 APAs in 2019, 12% more than in 2018 despite taxpayers accelerating 2018 APA requests to avoid a doubling of the APA user fee. The outcome might have been higher except for the government shutdown from the end of 2018 into 2019 and a reduction in personnel at APMA – team leaders declined from 56 in 2018 to 52 in 2019. Renewal APAs again represent over 50% of APAs and Japan bilateral APAs are again approximately 50% of cases concluded.

The statistic that differs the most from prior years is the number of multilateral APA requests filed. Multilateral APA requests have historically been rare. From 2000 to 2017, a total of 11 had been filed. Seven were filed in 2018 and eight were filed in 2019. Multilateral APA requests involve negotiations between three or more governments and are often more difficult to coordinate and negotiate than bilateral APAs. While too early to suggest a trend, the numbers may show the impact of recent OECD efforts at multilateral coordination and resolution of transfer pricing issues.

Despite the reduction in staffing and the government closure in 2018, the completion times for new unilateral and bilateral APA requests in 2019 was generally consistent with the prior year. The completion time for unilateral and bilateral renewal requests decreased. In the case of unilateral renewal requests, the decrease was significant.

The median time to complete new unilateral APA requests in 2019 was 33.2 months (compared to 30.7 months in 2018); the median completion time for unilateral renewals was 28.7 months (compared to 36.3 months in 2018). For new bilateral APA requests, the median completion time was 45.9 months (compared to 43.2 months in 2018), and for renewals it was 38.7 months (compared to 42.0 months in 2018).

In 2019, there were 68 renewal APAs concluded out of 120 APAs executed in 2019. At over 55%, this percentage is in line with the renewal percentage over the previous five years.

A small number of APAs withdraw each year. In 2019, twelve APAs were withdrawn, far lower than the 21 cases withdrawn in 2018. Eight were withdrawn in 2017. As in prior APA reports, the 2019 report does not provide an explanation for the withdrawals.

APMA executed 49% of its bilateral APAs with Japan, up from 39% in 2018. Canada is APMA’s second highest treaty partner with 11% of APMA’s APAs in 2019, compared with 20% of APMA’s APAs executed in 2018. Korea is third, with 10% in both 2019 and 2018.

The types of transactions covered, the transfer pricing methods (TPM) used and the APA terms provided were all generally consistent with prior years. The most common transaction types involved distribution or services (including manufacturing), and the most common TPM was the comparable profits method, which was used in 81% of cases involving transfers of tangible and intangible property. The operating margin was the most common profit level indicator, used in 64% of the cases. Eighteen percent of the cases completed in 2019 involved the use of intangible property, which is generally consistent with the percentage in 2017 and 2018 (21% in each year).

Consistent with prior years, the majority of APAs executed in 2019 had five-year terms, and several APAs had terms far longer than that, with the longest being 15 years. The longer terms generally stem from APMA and taxpayer desire for prospectivity. In the case of certain intangible transfers, the longer terms sometimes correspond to the agreed term over which payments will be made.

In 2019, 25% of APAs executed included rollback years. In 2017 and 2018, approximately 20% and 22%, respectively, of executed APAs included rollback years.

Overall, the statistics show that APMA remains a robust forum for resolving transfer pricing issues. Despite staffing and other challenges, the program managed to complete a significant number of cases, with completion times consistent with, and in some cases lower than, in prior years. A large number of cases were executed with APA terms longer than five years, showing an emphasis on prospective certainty. The program has long been, and continues to be, attractive to taxpayers who want to resolve transfer pricing issues bilaterally, in particular with treaty partners such as Japan and Canada. It now appears that APAs have become increasingly attractive for resolving transfer pricing issues multilaterally and the coming years will show whether that trend continues.

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

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Yasmin Dirks
Washington National Tax Office
T +1 202 521 1506

Mike Del Medico
Washington National Tax Office
T +1 202 521 1522

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