On March 27, 2023, the Internal Revenue Service (IRS) issued its Announcement and Report Concerning Advance Pricing Agreements (APA Report) for 2022, which presents the key APA results of the IRS’s Advance Pricing and Mutual Agreement Program (APMA). The report shows there is an increasing number of taxpayers taking advantage of the program (183 APAs filed) to minimize their transfer pricing controversy with the IRS and foreign countries; however, a smaller number of APAs are being executed (only 77). This decrease is not entirely surprising given the decrease in APMA staffing, specifically 20 fewer team leaders. However, because bilateral APAs require the participation of multiple tax authorities, it is not clear the extent to which the reduced percentage of completions is attributable to resources at the IRS or other considerations with foreign treaty partners, such as positions taken in particular APAs or their resources.

Introduction to APAs and 2022 APA Report

An APA is an administrative approach that attempts to prevent transfer pricing disputes from arising by determining criteria for applying the arm’s length principle to transactions in advance of those transactions taking place (it is a pre-filing resolution tool). (Definition from OECD). An APA is an agreement between the taxpayer and the tax authority on the pricing of future intercompany transactions, and in the case of a roll-back, it would also include past years. Chapter IV of the OECD Transfer Pricing Guidelines (OECD, 2017[2]) defines an APA as:

An Advance Pricing Arrangement (APA) is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g., method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time. An APA is formally initiated by a taxpayer and requires negotiations between the taxpayer, one or more associated enterprises and one or more tax administrations. APAs are intended to supplement the traditional administrative, judicial and treaty mechanisms for resolving transfer pricing issues.

The purpose of an APA is to provide certainty to the taxpayer and tax authority about the pricing of transactions, which can help to avoid disputes over transfer pricing. APAs are intended to be negotiated before the transactions take place and are based on a thorough analysis of the functions performed, assets used and risks assumed by the related parties. APAs can cover a wide range of transfer pricing issues, including the pricing of tangible and intangible assets, intercompany services and financial transactions.

An APA may be unilateral, bilateral or multilateral.

• Unilateral: APA entered into between a taxpayer and the tax administration of the country where it is subject to taxation. Unilateral APAs are solely domestic law instruments of jurisdictions and only provide tax certainty in relation to covered transaction(s) in a single jurisdiction.
• Bilateral: APA entered into between the taxpayers, the tax administration of the host country and the foreign tax administration. Bilateral APAs are APAs between two jurisdictions and are generally implemented domestically through an agreement between the relevant taxpayer(s) and each competent authority. However, some jurisdictions allow for the possibility of taxpayers to be party to the BAPA. Both methods give tax certainty in relation to covered transaction(s) in both jurisdictions.
• Multilateral: APAs between more than two jurisdictions. Multilateral APAs offer significant tax certainty for taxpayers and competent authorities as compared to traditional bilateral agreements in situations involving more than two jurisdictions. However, given the coordination required and the relative inexperience of most jurisdictions in undertaking such engagements, Multilateral APAs raise significant challenges as well.

As the OECD Bilateral Advance Pricing Agreement Manual indicates, “Given the benefits of BAPAs and multilateral APAs with respect to eliminating double taxation, most jurisdictions prefer bilateral or multilateral APAs, and indeed some jurisdictions will not grant a unilateral APA to taxpayers in their jurisdiction. It is also the case that some jurisdictions are not permitted under domestic law to enter into binding agreements directly with the taxpayers, and so, APAs can be concluded with the competent authority of a treaty partner only under the mutual agreement procedure.”

In 2022, the percentage of renewals executed decreased, with only 55 percent of all APAs executed in 2022 vs. 63 percent in 2021.

The number of employees in the APMA Program dropped from 118 in 2021 to 98 in 2022, (approximately 17 percent decrease in staffing). The totals are based on the Director, three Assistant Directors, and nine Managers, along with 26 Economist in 2022 vs. 25 in 2021 and 59 Team Leaders in 2022 vs. 80 in 2022.

Comparison by Country

The diagram above shows the breakout by country of the 66 bilateral APAs executed in 2022.

The countries with the highest number of executed APAs are Japan, Canada, India and Switzerland. Japan has traditionally had the most cases executed and pending over the years, with Canada being second. It is worth noting that for India, there were 20 new filings, six signed APAs, and 105 still pending now. Germany had over 20 APAs executed in 2021, but only four in 2022. Canada moved from seven percent in 2021 to four percent in 2022. This indicates that Canada and the US had several more APAs finalized this year than last year; however, it is not double the amount since the number of executions overall was down in 2022.

Types of Transactions Covered

APAs by Industry

The manufacturing industry was the most active industry in terms of APA applications and agreements, followed by the wholesale and retail trade industry.

Completion time and term lengths of APAs executed in 2022

The delayed processing times for bilateral APAs raises a concern, as it means that most of the years of an APA are complete by the time the APA is executed. However, in some cases, it means the IRS APMA Program is giving longer APAs since it took so long for the government to agree. For 2022, 23 of the agreed APAs were for seven to 11-year terms, as opposed to a typical term of only five years.

Transfer pricing methods used

For 2022, the Comparable Profits Method/Transactional Net Margin (CPM/TNM) method has been the most commonly applied transfer pricing for both the sale of tangible and intangible property (77 percent in 2022 vs. 85 percent in 2021).

The number of APA agreements executed by the IRS declined in 2022. According to IRS officials, APMA was able to complete certain APAs with virtual meetings when the underlying transactions were relatively routine or uncontroversial in nature. However, the newly accepted APAs and APAs with complex transactions were delayed during the pandemic because of scheduling difficulties, as well as virtual meetings with treaty partners being less efficient than in-person discussions. While 2021 APA completions were in line with past years because the APAs have been agreed to prior to the pandemic and were finalized in 2021. According to the IRS, these factors contributed to fewer completed APAs in 2022, longer time frames for case development and closure times.

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