How Transfer Pricing Trends Reshape Advanced Pricing Decisions

Advanced pricing agreements (APAs) constitute a formal mechanism for prospective dispute prevention, and their relative attractiveness depends significantly on the prevailing global transfer pricing enforcement climate. This article examines the decision framework relevant to taxpayers considering an APA, evaluates current US and global transfer pricing enforcement trends, and analyzes the implications of these trends for the strategic value of entering into an APA.

Decision to Pursue an APA

The decision to pursue an APA is voluntary and entails a meaningful commitment of resources. Taxpayers should engage in a structured evaluation of the potential benefits, including the degree and type of prospective certainty desired, the comparative cost-benefit profile relative to traditional examination routes, and any taxpayer specific considerations that may influence the feasibility or expected value of an APA.

Certainty. Taxpayers pursuing an APA are seeking some combination of certainty regarding transfer pricing penalties, double tax, tax adjustments, financial reporting, and customs valuations. The value placed on different types of certainty varies greatly from company to company and may depend on the company’s overall appetite for risk.

Penalties: Section 6662 imposes 20% and 40% non-deductible penalties on transfer pricing valuation misstatements that produce an increase in US income tax. IRC §6662(e), (h). Transactions can be excluded from the adjustment calculation to the extent the taxpayer demonstrates that it determined its price in a reasonable manner. Taxpayers prepare annual transfer pricing documentation to exclude transactions from exposure to the penalty.

After the taxpayer executes an APA, the taxpayer is only required to demonstrate compliance with the APA to avoid penalties under §6662. IRC §6662(e). Documents submitted in the APA process may satisfy the requirements to avoid a penalty. Taxpayers with expired APAs can leverage the agreed methodology to avoid penalties for a few subsequent years, provided no material changes to the transactional structure occur. An APA also eliminates the need to annually update the comparable company information used to prepare the taxpayer’s transfer pricing documentation.

Double Tax: Where one jurisdiction makes an upward transfer pricing adjustment and the corresponding jurisdiction does not grant correlative relief, the taxpayer becomes subject to double taxation. The negotiation of a bilateral APA prospectively eliminates the possibility of double taxation by achieving mutual agreement on the transfer pricing treatment of the covered transactions. Provided the taxpayer adheres to the APA’s terms, the agreed methodology prevents the imposition of adjustments in the event of an examination.

Transfer Pricing Adjustment: Even if the taxpayer were to avoid double taxation by receiving correlative relief, any sustained transfer pricing adjustment would still require the expensive filing associated with amended tax returns. This exposure could also be prospectively eliminated by compliance with a bilateral APA.

Financial Reporting for Transfer Pricing: Accounting Standards Codification (ASC) 740, Income Taxes, imposes a minimum recognition and measurement threshold for financial statement reporting of uncertain tax positions (UTPs), and transfer pricing is an UTP. ASC 740 requires a two-step process. First, the enterprise shall recognize only the financial statement effects of a tax position when it is more likely than not (a likelihood of more than 50%), to be sustained upon examination, based solely on the technical merits. ASC 740-10-25. Second, a recognized position is measured as the tax benefit at the largest amount that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. ASC 740-10-30. Execution of the APA generally eliminates any transfer pricing related UTPs.

Customs Valuation: Customs duties or tariffs are assessed based on the “dutiable value” of imported goods. For transactions between related parties, many companies use “transaction value” for valuing imported goods relying on the transfer price developed for tax purposes. In this situation, a downward adjustment in the sales price of products to a related party made to increase the buyer’s taxable income has the corresponding result of decreasing the buyer’s duties in the importing country. Customs valuation issues arising from sustained transfer pricing adjustments are likely to require the importer to report changes in values. By avoiding transfer pricing adjustments, an APA eliminates the need for the administrative effort to correct the customs valuation.

APA Cost-Benefit Calculation. Companies typically decide to pursue an APA when they anticipate that, over the long term, the costs of transfer pricing compliance under an APA will be lower than those associated with the standard enforcement process. This determination based on a cost-benefit analysis that considers both upfront expenditures and potential future financial exposure. Assuming the transfer price is held constant, the comparison can be reduced to the relative costs and administrative effort associated with each approach.

* Any applicable penalties and interest are a function of the magnitude of the intercompany transaction(s) and likelihood the IRS imposes penalties.

General Comparison—APA vs. Standard Dispute Process. APAs require payment of an IRS user fee and the initial effort of preparing the formal request. Traditional transfer pricing examinations, in contrast, can be time-consuming and costlier due to their complex factual and economic issues requiring subjective judgment. The tax authorities often request extensive information requiring taxpayers to expend significant time and money on voluminous data, much of which may prove tangential to the core transfer pricing issues. The standard Appeals and Mutual Agreement Procedure (MAP) processes add substantial time and increase taxpayer burden. Most companies find that the staffing of the APMA program and the efficient approach produce cost savings that overcome the user fee and up-front costs. A taxpayer that does not anticipate examination is unlikely to justify pursuing an APA. To the extent a taxpayer believes itself to be at risk of an examination, the benefits of an APA are readily apparent. Any adjustment can also carry the additional cost of penalties and interest as well as amended federal and state tax returns and customs filings. Any benefit achieved by an APA can also be enhanced by rollback or renewal.

* Information derived from the Internal Revenue Service.

Company-Specific Factors. The ease with which a company can pursue an APA and the overall benefit that company can achieve through the APA process is influenced by taxpayer-specific factors.

Risk Tolerance: The risk tolerance of the company’s management strongly affects the decision whether to pursue an APA. Without some risk of a transfer pricing examination and dispute, company management would generally not approve of the cost and effort of the APA process. Given the cooperative nature of the APA process and the information requirements, taxpayers with materially aggressive transfer pricing positions are generally ill-suited for the APA process. The APA process works best with taxpayers that have taken a reasonable transfer pricing position but still value the benefit of certainty around those positions.

Industry Experience: The industry in which the company operates may have some impact upon the decision whether to pursue an APA. Some industries, notably the automotive and pharmaceutical industries, are encouraged by the inherent size, global exposure and uncertainty of transfer pricing outcomes to seek the certainty of an APA. Other industries (e.g., electronics) are encouraged by the relatively high levels of experience of the IRS APMA program and other tax authorities with the industry and its issues.

Involved Countries: The countries involved, and the negotiating relationship between those countries, can sometimes affect the decision whether to pursue an APA. Unless a treaty exists, no bilateral APA or multilateral APA would be possible. A lack of negotiating experience between the affected countries may indicate that the APA process may take longer than negotiations between jurisdictions with more established bilateral experience. Also, the efficacy of the core negotiating relationships between the affected countries sometimes produces greater or less effectiveness.

Type of Issues: The type of transfer pricing issue can affect the decision whether to pursue an APA and whether the APA is best dealt with bilaterally or unilaterally. Some issues, like royalty determinations, may be inherently difficult to resolve without a bilateral negotiation. A bilateral APA may be the most effective way to eliminate the exposure to a transfer pricing examination in either country. In other circumstances, the issues and likely outcome of an APA for US distribution may be relatively straightforward, but the time and cost of negotiating a bilateral APA may still be cost effective because of a desire for additional certainty.

Transfer Pricing Trends

After a period of expansion in transfer pricing resources with increased IRS hiring and funding, the IRS now confronts significant reductions in both staffing and funding allocated to enforcement. Globally, transfer pricing enforcement has intensified. Recent Tax Court wins and increased imposition of §6662 penalties have raised the profile of transfer pricing as an UTP for financial reporting under ASC 740. Finally, material new US tariffs have begun to affect transfer pricing compliance.

US Transfer Pricing Enforcement. For the last decade, the IRS has implemented centralized oversight over transfer pricing cases, encompassing selection, issue development, and coordination with litigation teams. Recently, the IRS achieved some full and partial wins in Tax Court transfer pricing litigation. The IRS has been investing in additional personnel and technology to increase its transfer pricing enforcement capabilities. The IRS has addressed key issues involving intercompany indebtedness and intangible property through Generic Legal Advice Memorandums (GLAMs) and has launched a data analytics-based “compliance alert” initiative targeting perceived noncompliance among foreign-owned distributors.

In January 2025, the IRS budget was reduced to $12.3 billion, and a return-to-office policy was implemented. Since then, the IRS lost approximately 25% of its workforce and nearly all of the leadership in international tax. Additional reductions are anticipated under the fiscal year 2026 budget, along with potential voluntary departures resulting from the recent furloughs.

The IRS is reprioritizing its enforcement approach to fit its substantially reduced staffing and resources. The IRS will need to support an unusually large inventory of transfer pricing disputes in Tax Court, district courts, and circuit courts as well as ongoing examinations. The IRS may be required to curtail certain enforcement initiatives and redirect resources toward existing disputes. However, the relatively resource efficient data analytics initiatives are expected to continue.

The following recent wins or partial wins at Tax Court are in various stages of appeal:

• The Coca-Cola Company & Subsidiaries v. Commissioner, 155 T.C. No. 10 (2020). On August 2, 2024, the US Tax Court entered a decision against The Coca-Cola Company that reflects a tax underpayment of approximately $2.7 billion and interest of approximately $3.3 billion for tax years 2007 to 2009. The case has been appealed to the US Eleventh Circuit Court of Appeals.
• 3M Company & Subsidiaries v. Commissioner, 160 T.C. No. 3 (2023). On February 9, 2023, the US Tax Court ruled in favor of the IRS in a “blocked income” case, resulting in a $27.3 million adjustment to reflect an arm’s length royalty rate from 3M’s Brazilian subsidiary. However, in late 2024, the US Court of Appeals for the Eight Circuit, citing Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, No. 22-451 (June 28, 2024), held that the IRS exceeded its authority and remanded the case to the Tax Court for further consideration.
• Medtronic, Inc. and Consolidated Subsidiaries v. Commissioner, No. 17-1866 (2025). Upon receiving the case for re-trial, the Tax Court applied a three-step unspecified method that resulted in approximately $1.4 billion in adjustments for tax years 2005 through 2006. The case was again appealed to the Eighth Circuit Court of Appeals, which vacated the Tax Court’s decision, finding that the Tax Court erred in rejecting the IRS’s proposed transfer pricing method and had adopted a method not permitted under applicable regulations. The Eighth Circuit instructed the Tax Court to conduct further proceedings consistent with its opinion.
• Facebook, Inc. v. Commissioner, No. 21959-16, 164 T.C. No. 9, 2025 BL 177072 (May 22, 2025). The case focused on the valuation of intangible property rights transferred under a cost sharing arrangement. The decision endorsed the IRS’s transfer pricing method but rejected some inputs and assumptions.

A recent Supreme Court decision, Loper Bright Enterprises v. Raimondo, threatens to alter the framework for judicial review of tax regulations, including the regulations under §482. Loper Bright eliminated the “Chevron doctrine,” which had required courts to defer to agencies’ reasonable interpretations of unclear statutes. The court emphasized that the Administrative Procedure Act obligates judges to apply their own independent judgment rather than defaulting to agency views simply because a law is ambiguous. Under this new approach, courts will interpret ambiguous statutes independently, which creates judge-by-judge variability and makes outcomes harder to predict.

The impact of Loper Bright on transfer pricing litigation is still evolving. In 3M, the Eight Circuit Court of Appeals reversed the Tax Court, citing Loper Bright. In Abbott Laboratories v. Commissioner, No. 20193-24 (Dec. 26, 2024), the taxpayer cited Loper Bright to dispute in Tax Court with the IRS’s inclusion of stock-based compensation in a cost-sharing arrangement and services transactions. The taxpayer in McKesson Corp. v. United States, No. 3:25-cv-01102 (May 2, 2025) filed a tax refund lawsuit in district court alleging that the regulations requiring stock-based compensation in cost-sharing agreements are invalid based upon the holding in Loper Bright. The integration of Loper Bright principles into judicial review could trigger more challenges to IRS regulations and introduce significant uncertainty in transfer pricing disputes.

Global Transfer Pricing Trends. Globally, transfer pricing enforcement has markedly intensified, driven by expanded audit programs, greater analytical capacity, and a clear move toward challenging the alignment between reported results and where value is created. Caleb Harshberger, Tariffs, Big Audits, Roil Transfer Pricing Heading into New Year, Daily Tax Rep. (Dec. 10, 2025). Tax authorities in many regions have increased their scrutiny of intercompany arrangements involving goods, services. Marcelo Moura, Abhishek Padwalkar, Ruth Mirembe, and Prisca Musibi, The Transfer Pricing World in 2024 (June 4, 2024). With tax authorities worldwide engaging in deeper fact‑finding and taking increasingly assertive enforcement positions, including procedural shifts such as Germany cutting its submission timeline in half, these heightened efforts are driving more frequent penalties and contributing to a growing number of multi‑year, multi‑jurisdictional disputes. As this landscape evolves, taxpayers are facing a higher probability that routine transfer pricing positions will be challenged, that examinations will require extensive information and time to resolve, and that local tax administrations will increasingly pursue interpretations centered on economic substance, control of risk, and functional alignment.

The increase in audit activity also has pushed more transfer pricing disagreements into judicial forums around the world. Courts across several regions globally have become more active in evaluating complex transfer pricing disputes, and their decisions show growing emphasis on accurate delineation, commercial coherence, contemporaneous evidence, and demonstrable value creation. These cases highlight jurisdictions’ willingness to uphold tax authority challenges where taxpayers cannot show that intra‑group arrangements reflect genuine economic reality. Michael Hewson, Courts Play Key Role as Transfer Pricing Disputes Escalate, Tax Mgmt. Int’l J. (Nov. 19, 2025). At the same time, the increased intensity of audits have reinforced the appeal of dispute‑prevention mechanisms.

Penalties. Until recently, the IRS did not apply the §6662 penalty provisions as assertively as the statute allows. The IRS, however, has announced a change in approach and has asserted these penalties more frequently in recent cases, such as Amgen ($10.7 billion of tax, penalties, and interest) and Microsoft ($28.9 billion of taxes plus penalties and interest). The IRS has also asserted penalties in Newelland Airbnb. Tristan Navera, Airbnb Hit With $2 Billion Tax and Penalty Over Transfer Pricing, Daily Tax Rep. (Aug. 2, 2024).

There is no reason to believe that the IRS will discontinue the practice of asserting penalties when thresholds are met, and the IRS deems documentation is insufficient.

Financial Reporting for UTPs. Evolving enforcement and litigation dynamics may alter UTP reporting requirements. Companies under transfer pricing audits have historically taken the position that the company will prevail in the controversy, resulting in low or no tax reserve and minimal disclosure of transfer pricing matters in financial statements. The improved IRS record in transfer pricing litigation and the increased assertion of transfer pricing penalties could change how companies evaluate their transfer pricing-related exposure for financial reporting.

The UTP disclosure for transfer pricing exposure is being contested in court. In 2023, the Roofers Local No. 149 Pension Fund sued Amgen Inc. and others based on Amgen’s alleged failure to adequately disclose information about transfer pricing disputes with the IRS. Amgen disclosed the transfer pricing dispute with the IRS regarding the Puerto Rico transactions, explaining that the IRS positions were “without merit,” but omitted mention of the amount at issue for both periods in question — $10.7 billion in total.

Tariffs. Since January 2025, the Trump administration has raised tariffs on US imports to their highest average levels in recent history. Because the tariff cost becomes part of the cost of goods sold for imported products, these tariffs have a direct impact on the operating income of the party bearing the tariff. Although the tariff rules impose initial responsibility for payment of the tariff on the “importer of record,” the parties may pass the tariff on to customers by increasing prices or shift/allocate the tariff costs to the exporter by a reduced import value. Any allocation arrangement between related parties must satisfy both customs and transfer pricing rules.

If the entity bearing the tariff expense is the tested party for transfer pricing purposes, the impact of these large tariffs on the US importer’s profitability could push the operating margin out the bottom of the benchmarking range, thus requiring a post-importation transfer pricing adjustment to achieve an arm’s length result. Because the transfer price in most instances is also the import price, a post-importation price adjustment for customs purposes will also be required.

Under US transfer pricing rules, an upward transfer pricing adjustment to the income of a US-related party necessarily produces a corresponding downward adjustment to the counterparty. The tax authority in the other involved country may not agree to the change. A US taxpayer can request the IRS’s assistance under a tax treaty to endeavor to achieve a downward adjustment to the income of the related party in a tax treaty country. This treaty mechanism, known as MAP, allows treaty partners to eliminate double taxation arising from transfer pricing disputes. Based on informal discussions with some tax authorities, US treaty partners may object to the reduced tax revenues caused by the tariffs imposed by the US government. Shifting the cost of tariffs to other tax jurisdictions through transfer pricing mechanisms will likely lead to some difficult discussions among tax authorities in bilateral negotiations between treaty partners in the MAP or in bilateral advance pricing agreements as taxpayers seek to avoid double taxation.

The impact of tariffs could easily be large enough to disrupt transfer pricing compliance. In appropriate circumstances, passing it on to customers or pushing it back to a principal may be appropriate and will reduce the impact. However, taxpayers still need to review their transfer pricing for this year and consider true-up adjustments.

Impact of Trends on APA Desirability

The transfer pricing trends discussed above are multifaceted, and their impact on the desirability of an APA varies according to the taxpayer’s specific facts and circumstances. The general impact of these trends can be predicted in a manner to assist the decision process whether to seek an APA.

The degree to which a company requires certainty depends on fluctuations in its transfer pricing risk, particularly those risks an APA could reduce or eliminate. The change in cost-benefit calculation is driven by any relative increase or decrease in the cost of process or likely outcome between the regular process and the APA process. Company-specific considerations will likewise be affected by any trend that alters those underlying drivers.‑specific considerations will likewise be affected by any trend that alters those underlying drivers.

Enforcement. US and global transfer pricing enforcement trends have changed drastically in the last few years. Years of increased IRS budget and staffing have improved the IRS success rate in transfer pricing enforcement and increased companies’ need for certainty regarding penalties, double tax, adjustment, financial reporting and customs valuation. The 2025 IRS staffing and budget cuts seem likely to reduce the agency’s ability to expand transfer pricing enforcement, and ongoing cases create additional exposure for taxpayers. Recent IRS wins in Tax Court further raised taxpayers’ need for certainty, but the appeals of these cases and the elimination of Chevron deference in Loper Bright have undermined the IRS position with regard to regulatory guidance. Other countries also have become more active in transfer pricing enforcement. Overall, the US and global transfer pricing enforcement continue to increase the taxpayer need for certainty.

Penalties. The IRS’s recent shift toward a more assertive application of §6662 penalties has introduced additional uncertainty and significantly altered the cost-benefit calculation of pursuing an APA. Proposed transfer pricing adjustments exceeding $20 million may trigger a 40% penalty. An APA mitigates this risk by allowing taxpayers to resolve transfer pricing issues prospectively and avoid potential penalty exposure. Avoidance of exposure to a potential 40% may be the strongest incentive to consider an APA.

UTPs. The exposure around UTPs also has risen in recent years, due to IRS Tax Court wins, large amounts in issue, and the changed IRS approach to penalties. Further, the investor lawsuit in Amgen raises the potential for non-tax exposure.

Tariffs. Although tariffs certainly increase the taxpayer’s need for certainty, there has been little experience with MAP and APA resolution of the issue. To date, the issue has mostly been resolved on a case-by-case basis between treaty partners, providing scant information to guide taxpayer decisions. Achieving certainty regarding tariffs may not be a primary reason to pursue an APA, but should be added to any new APA request that has tariff exposure.

Country-Specific Factors. The risk tolerance of the company should not be affected by transfer pricing trends. Industry experience and countries should not have a large impact. Some trends will affect the type of transaction. For example, much of recent US litigation involves high-value intangible property, which might encourage an APA for resolution of a complex and large transaction.

Takeaways

Overall, recent trends in transfer pricing enforcement have made APAs a more attractive option. The need for greater certainty is expanding in response to increased audit and litigation activity, while the IRS’s stricter posture on §6662 penalties and the growing impact of UTPs further encourage taxpayers to consider prospective resolution through an APA. Nonetheless, taxpayers should conduct a comprehensive evaluation of all relevant factors before determining whether an APA is appropriate.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Steven C. Wrappe is the National Technical Leader of Transfer Pricing in Grant Thornton’s National Tax Office and an adjunct professor in the New York University and University of California-Irvine tax programs. Hayley M. Yarem is a Transfer Pricing Manager at Grant Thornton in Raleigh with an MBA from Duke University. Liza Meier is a Transfer Pricing Senior Associate at Grant Thornton in New York City. Jonah Harrison is a Transfer Pricing Senior at Grant Thornton in Chicago with an MSC from the University of Exeter Business School.

Grant Thornton LLP and GT Advisors (and their respective subsidiary entities) practice as an alternative practice structure in accordance with the American Institute of Certified Public Accountants Code of Professional Conduct and applicable law, regulations, and professional standards. Grant Thornton LLP is a licensed independent CPA firm that provides attest services to its clients, and GT Advisors and its subsidiary entities provide tax and business consulting services to their clients. GT Advisors and its subsidiary entities are not licensed CPA firms.

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