Outlook Is Bright for the IRS Advance Pricing Agreement Program

The IRS’s advance pricing and mutual agreement program executed 156 APAs in 2023, according to its annual APA report released March 26. This is the most APAs executed in a single year since the program’s founding.

This is welcome news given the challenges multinationals face: more assertive transfer pricing audits in the US and worldwide, record-breaking assessments (tens of billions of dollars), and an uncertain legal landscape. In this environment, we believe APAs are among the best tools to mitigate the most significant tax risks multinationals encounter.

The number of executed APAs during 2023 reflects significant investments and refinements to the IRS’s APMA program. While staffing increased by almost 20% as compared with 2022, the successes in 2023 were also aided by additional efforts to increase efficiency, streamline case processing, and improve best practices within the program.

The increasing use of standardized comparable sets for certain routine transactions and efforts to spread jurisdictional oversight across the four APMA teams (including one treaty interpretation team) supported by two senior advisers to the director further led to these remarkable results.

Based on recent discussions with the APMA and the anticipated release of a new APA revenue procedure, we understand the division believes taxpayers can assist with further streamlining and expediting the APA process by preparing robust, thoughtful APA submissions. These must more clearly delineate the functions and risks of covered parties and provide thorough support for the selected transfer pricing methods.

This may require greater upfront investment for submissions that didn’t already reflect this as a best practice. Yet it should pay dividends with fewer rounds of due diligence submissions and reduced risk of differing interpretations among treaty partners.

To further streamline APA case processing times, the new revenue procedure should also bring back case plans and case management tools. Nevertheless, while APMA may continue to improve its efficiency, timely execution of an APA also depends on the efficiency of the treaty partner’s competent authority.

These efforts seem tailored to address the very lengthy time frame between submission and execution of an APA—a perennial complaint from taxpayers. The other main complaint is the cost of APAs, which includes fees paid to advisers and demands on multinationals’ in-house resources.

A shorter APA process should significantly reduce the overall cost—for many APAs, the post-submission costs exceed those required up to submission.

While costs incurred are far more obvious than costs avoided, the latter are significant. Once an APA submission is accepted, transfer pricing audits for both parties to the APA for covered years are typically averted.

In some cases, an APA submission may also suspend ongoing audits for the covered issues. Addressing audits is expensive, in addition to the work required to contest potential adjustments and resolve issues of double taxation—whether via mutual agreement procedures, appeals, and/or litigation.

APAs are frequently much more cost-effective than the combination of examination and MAPs because they are less contentious (no tax authority has made an assessment that they feel obligated to defend) and because they can provide both historic and prospective tax certainty.

Recent and expected developments at the APMA are encouraging and we applaud all efforts to improve the program. There are still some potential headwinds. APAs are treated as binding contracts, and the IRS has the burden of proof to support cancellation of an APA.

The new revenue procedure is anticipated to provide the IRS with more contractual flexibility. We strongly encourage the APMA to very narrowly tailor any such flexibility so APAs will continue to provide taxpayers with essential legal certainty given time and effort.

Current trends indicate that APA processes will continue to improve. Pending implementation, the Amount B rules could further expedite and streamline APA negotiations, increasing competent authority resources to focus on and resolve APAs that involve more complicated transactions.

Combined with APMA’s increased staffing and continued enhancements to the process, we expect APAs will remain desirable among taxpayers as an effective means to resolve complex transfer pricing issues and achieve legal certainty.

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

Author Information

Amanda Worcester Martin is partner with Baker McKenzie, with focus on corporate and international tax planning and tax dispute resolution.

Eric Torrey is a principal economist with Baker McKenzie Consulting, advising multinationals on transfer pricing and ancillary matters.

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