INSIGHT: Current Trends in U.S. Advance Pricing Agreements

Sept. 2, 2020, 7:01 AM

The Internal Revenue Service’s Advance Pricing Agreement (APA) program has been around since 1991, negotiating prospective agreements with taxpayers and other tax authorities on complex transfer pricing issues. Established as an alternative to the regular transfer pricing enforcement process, the APA program, renamed the Advance Pricing and Mutual Agreement (APMA) program in 2012, is going strong. Over its 29 years of existence, the APMA program has received over 2,549 APA requests and completed over 1820 APAs. In fiscal year 2019, it received 121 APA requests and completed 120 APAs.

Due to the role of an APA as an alternative to the regular transfer pricing enforcement process, the value of an APA to a particular taxpayer can be determined by comparison of the cost, effort, and results of an APA versus the cost, effort, and results of the regular transfer pricing enforcement process. Taxpayers considering an APA often go through an internally focused decision process that considers the value of the expected certainty, a consideration of the costs and effort required, and some taxpayer-specific aspects that will affect the APA process for that taxpayer.

Two of the main factors that impact the value of an APA to all taxpayers continue to fluctuate. First, global transfer pricing trends external to the APA process have an impact on the expected cost, effort, and results of not seeking an APA. Second, APA trends and changes to the APA process itself affect the taxpayer expected costs, effort, and results of seeking an APA. This article will review the global transfer pricing trends that have drastically increased transfer pricing uncertainty and the recent changes within the APA process itself that affect taxpayer expectations for the process.


The expected outcome, cost, and effort of transfer pricing compliance without an APA is constantly changing. For at least the last decade, the geographic breadth and overall intensity of global transfer pricing enforcement continue to increase. Substantive changes and record-keeping requirements have been encouraged by the Organization for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project. Changes to international tax rules in the U.S. and elsewhere have heightened the importance of transfer pricing determinations. The use of high-rate tariffs in trade wars and the digital service taxes and tariffs triggered by OECD discussions on tax challenges of digitalization have raised transfer pricing issues. Finally, the Covid-19 pandemic and subsequent recession have raised fundamental transfer pricing issues. The combination of these trends has created great uncertainty regarding the transfer pricing determinations of multinational enterprises (MNEs).

Increased Global Transfer Pricing Enforcement

Because the APA process is an alternative to the regular transfer pricing enforcement process of examination, the IRS Appeals Office, and litigation and/or mutual agreement procedure, any change in global transfer pricing enforcement has a great impact on the desirability of APAs.

Each year more countries initiate active transfer pricing enforcement, inevitably increasing the number of transfer pricing disputes. The global inventories of disputes between treaty partners, largely composed of transfer pricing issues, have nearly doubled in eight years, from 3,328 cases in 2010 to 6,605 cases in 2018. Further, the OECD has acknowledged that recent BEPS-related changes to transfer pricing are likely to produce an increase in the number of transfer pricing disputes between treaty countries. In recent years, the IRS has more actively pursued transfer pricing issues in examination and beyond. The IRS win in the Altera case was recently confirmed when the U.S. Supreme Court declined to review it, and the IRS has made recent public statements in support of transfer pricing examinations and litigation. This heightened global exposure to transfer disputes increases the anticipated costs and efforts of the regular transfer pricing enforcement process, thus making APAs relatively more desirable.

BEPS-Driven Changes

The OECD BEPS report, released in 2015, contained 15 actions that counter the ability of businesses to engage in BEPS, including a combination of strengthened restrictions on taxpayer access to treaty benefits, more restrictive interpretation of language to prevent BEPS, and substantial additional taxpayer compliance efforts and disclosure. BEPS Actions 8, 9, and 10 encourage transfer pricing outcomes to reflect value creation—Action 8 focuses on intangibles, Action 9 focuses on risks and capital, and Action 10 focuses on high risk transactions. Action 13 of the BEPS Action recommends that companies with at least 750 million British pounds ($1 billion) in revenues file a country-by-country report (CbCR) showing the revenues, profits, taxes, number of employees, assets, capital, and earnings by country; the U.S. has incorporated that recommendation into its annual tax filing requirement for companies with $850 million or more in global revenues. In addition, Action 13 recommends a “master file” providing narrative and financial information on the entire business of the MNE. Finally, it recommends local files to be created documenting transactions taking place in each local jurisdiction, with detailed information requirements. This represents a substantial increase in the taxpayer compliance effort.

The BEPS-related changes to transfer pricing, especially the CbCR, are expected to increase the number of transfer pricing disputes. Taxpayers and countries have expressed concern regarding the ability of governments to keep up with BEPS-created transfer pricing disputes. In fact, the transfer pricing principles set out in the BEPS reports have been unevenly applied and have already created a significant amount of controversy.

U.S. Tax Reform

The Tax Cuts and Jobs Act of 2017 (U.S. tax reform) made changes to expand the definition of intangibles used for transfer pricing and allowed the review of intangibles on an aggregate basis or the basis of realistic alternatives. However, transfer pricing is also important in calculating income under several new tax regimes created by the legislation. U.S. tax reform created a base erosion and anti-abuse tax (BEAT) under tax code Section 59A, introduced the global intangible low tax income (GILTI) defined in Section 951A, and foreign derived intangible income (FDII) defined in Section 250. Although the direct changes to transfer pricing in the U.S. tax reform are minor, the importance of transfer pricing determinations has been greatly enhanced by its impact under each of the new BEAT, GILTI, and FDII tax regimes.


In recent years, the U.S. has actively imposed significant new tariffs on U.S. imports. In 2018, President Trump imposed a 25% and a 10% tariff, respectively, on steel and aluminum products imported into the U.S.; in June 2018, the U.S. Trade Representative (USTR) imposed a tariff of 25% on approximately $200 million of goods with a Chinese country of origin (the China tariffs have subsequently expanded and modified and delayed multiple times). More recently, the U.S. has threatened retaliatory tariffs against France and other countries enacting or considering digital services taxes (DSTs). Most recently, the U.S. has re-imposed tariffs on aluminum and steel imported from Canada.

These tariffs, and any retaliatory tariffs enacted by other countries, have an immediate, material impact on the transfer pricing results of multinational companies. Due a lack of recent experience with high tariffs, few companies are prepared to deal with the transfer pricing implications of those tariffs. To the extent that related party importers cannot raise prices to pass the impact of the tariffs on to customers, the tariffs will have a direct negative impact on the profitability of the importer, potentially causing results outside the arm’s-length range and requiring transfer pricing adjustments. Tariffs could also be present in the financial statements of comparable companies, thus affecting comparability, but financial statement reporting might not identify that issue. Adding to the uncertainty, the governments affected by the tariffs have yet to provide guidance regarding treatment of tariffs in transfer pricing analyses.

Tax Challenges of Digitalization

The last decade of digital growth has created a global tax problem that is currently under discussion at the OECD. Internet-based business models enable large MNEs to engage in transactions with consumers in a “market” country without triggering the traditional taxing nexus in that market country. The fact that highly profitable MNEs are not subject to taxing jurisdictions in those market countries has been identified as a tax challenge that needs to be addressed.

Concerns about the tax impact of the digital economy formed part of the motivation for the OECD BEPS project. However, the BEPS Action 1: Address the Tax Challenges of the Digital Economy Report (Action 1 Report) concluded that, due to the pervasive nature of the digital economy, it would be nearly impossible to isolate the tax aspects of that economy. Accordingly, the Action 1 Report discussed some recommendations, but only committed to monitor developments in the digital economy before taking action.

The OECD has been working since early 2019 to get a 137-country “Inclusive Framework” (IF) to agree to overhaul global tax rules to address how big technology companies are taxed. Pillar 1 of the plan would reallocate some of multinationals’ profits to market jurisdictions where they have users or consumers; this approach is likely to involve moving away from the arm’s-length standard to allocate income under a formulaic approach. Pillar 2 would establish a global minimum tax to address tax competition between countries.

In early 2019, the OECD proposed expanded taxing jurisdiction for market countries and a formulary allocation of deemed residual profits to include an allocation to those market countries. The OECD issued a discussion draft in February 2019, followed by stakeholder comments in March, and a detailed plan of work in May 2019. The OECD issued a “unified approach” in October 2019, which attempted to develop a consensus around the two-pillar approach. A November 2019 consultation meeting regarding Pillar 1 failed to develop consensus support. Finally, in December 2019, U.S. Treasury Secretary Steven Mnuchin sent a letter to the OECD expressing misgivings about the unified approach’s departures from established tax principles. In July 2020, the OECD delivered a status report) to the G20 regarding the tax challenges of digitalization. The IF is currently working to overcome “divergent” views on implementation of a two-part digital plan and expects to release blueprints of both portions of the plan by October.

A number of countries are unwilling to wait for a consensus resolution; France enacted a 3% digital services tax (DST) on gross revenues from digital advertising and data-driven revenue. The U.S. threatened a tariff of up to 100% on approximately $2.8 billion of French products including wine, cheese, and handbags in retaliation for the French DST. Many additional countries have or are considering enacting DSTs; the U.S. threatens to retaliate with tariffs. Each of these excise taxes and tariffs is new, and questions exist regarding the proper transfer pricing treatment of these costs.

Covid-19 Pandemic Recession

The Covid-19 pandemic has been devastating from both a human and an economic standpoint. Most national governments and nearly all U.S. states have issued stay-at-home orders and ordered most companies to conduct operations remotely or in some cases cease operations entirely. Most schools and universities have been closed for in-person attendance and various restrictions were implemented to prohibit large gatherings. The pandemic-induced recession has impacted almost all countries through severely negative effects on public health, employment, income, trade, tax revenues, debt, and gross domestic product.

Nearly all MNEs have been negatively impacted by depressed demand, with a few exceptions including digital services companies, biotech companies, and processed foods manufacturers which have found new profit streams from the pandemic. Further, many MNEs have experienced supply chain disruption, location changes, research obstacles, and shifted functions. Therefore, the pandemic recession is not only considerably more devastating than recent recessions, it has also had a uniquely disruptive impact on functions and risks.

The sudden changes in market conditions driven by the pandemic and the related recession have created serious transfer pricing issues. MNEs must seek answers to pressing transfer-pricing-related questions regarding changes in functions and risks, third party behavior, available market data, and governmental positions on pandemic-related issues. Many MNEs are faced with a decision whether to continue legacy transfer pricing approaches that rely on pre-pandemic expectations or to alter and document transfer prices to align with new arm’s-length realities. Whatever the choice, MNEs should be prepared to defend their transfer pricing determinations in a difficult time.


In addition to external factors, changes intrinsic to the APMA Program have affected the expected outcome, cost, and effort of an APA. The high rate of renewals, the availability of abbreviated APA requests, coordinated unilateral APAs, APA process standardization, and reference sets all point to increased efficiency in the APA process. The increased use of benchmark and multilateral APAs point to an increased utility for APAs in the future.

High Rate of APA Renewals

In the nearly 30 years that the IRS has been negotiating APAs, the 763 of the 1,820 APAs concluded (42%) have been renewals of previously agreed APAs. During the most recent five years (2015-2019), renewal APAs have constituted 57% of the APAs concluded. This high rate of renewal clearly indicates that taxpayers are satisfied with the APA process and that the agreements are providing the expected benefit. Renewal APAs generally cost far less to prepare and negotiate than original APAs. A great deal of background information from the original APA request can often be leveraged for the renewal request, and tax authority familiarity with the issues and economics can facilitate the APA process. In addition, recent comments from APMA personnel indicate that renewal APAs will be considered for abbreviated APA procedures, discussed further below.

Abbreviated APA Requests

Revenue Procedure 2015-41 provides that abbreviated APA requests may be permitted for APA renewals, small case APAs, and, potentially, for non-small case APAs. Rev. Proc. 2015-41 defines an abbreviated APA request as an APA request in which information, documents or content required for a complete APA request has been truncated or omitted, per explicit authorization from APMA. To receive that authorization, taxpayers should be able to show that omission of certain documents will not affect the APMA Program’s ability to process the request efficiently. An abbreviated APA request can significantly reduce the costs of pursuing an APA relative to a full APA request.

APA Process Standardization Efforts

In an effort to accelerate the APA process, the APMA program has taken strides to streamline the APA process. In Rev. Proc. 2015-41, the IRS expanded and standardized the information required to be submitted in an APA request. Based upon 25 years of experience, this increase in up-front information is intended to reduce the need for subsequent information requests. One of the required additions to the APA request is a taxpayer-prepared proposed APA document in the IRS APA template; this APA template has been revised to be more useful. On a less formal front, the IRS has generally reduced the number of IRS-taxpayer meetings (currently replaced by teleconferences in the pandemic environment) and begun to explore the use of “reference sets”—standardized sets of comparables encountered by taxpayers, governments, and representatives on multiple occasions, all of which could decrease the cost and increase the efficiency of pursuing certain types of APAs.

Coverage in Several Countries through Benchmark and Multilateral APAs

Since the early days of the APA program, a small group of very large MNEs have found it useful to negotiate a bilateral APA between two experienced treaty partners to set a benchmark for the appropriate transfer price for similar transactions with related parties in other countries. The company can then share the bilateral APA and supporting information with any new examining country to demonstrate that the likely outcome of a principled negotiation would produce no adjustment. Geographic differences aside, the attraction of a transfer price agreed between two experienced treaty partners on similar transactions is hard to deny. This “benchmark” approach has proven to be desirable, because those very large companies had exposure with regard to similar transactions in multiple countries that actively pursue transfer pricing enforcement.

Following BEPS and the implementation of CbCR, many more companies have viewed benchmark APAs as a viable option. The anticipated increase in transfer pricing examinations and potential double tax following the adoption of CbCR is expected to subject many new companies to transfer pricing scrutiny in multiple jurisdictions. In this environment, a benchmark APA to address similar transactions may be desirable for many more companies. Further, the Master File requires taxpayers to report any unilateral APAs or tax rulings. Thus, tax authorities in jurisdictions with Master File requirements will be more aware of the existence of a benchmark APA.

In addition to using benchmark APAs to support transfer pricing in multiple jurisdictions, taxpayers have recently begun to pursue multilateral APAs. 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. Recent comments from APMA personnel suggest that the increase in multilateral APAs is not an anomaly, and that the trend toward will continue. The increase may reflect the impact of recent OECD efforts at multilateral coordination and increased efficiency in the resolution of transfer pricing issues.

Coordinated Unilateral APAs

In 2016, the IRS announced an agreement with Mexico’s Servico de Administracion Tributaria (SAT) whereby U.S. taxpayers with a maquiladora in Mexico would not be exposed to double tax if the taxpayer enters into a unilateral APA with SAT’s Large Taxpayer Division. The terms of these agreements were worked out in advance between the U.S. and Mexico competent authorities after two years of collaboration. This agreement allows taxpayers some of the benefits of a bilateral APA, without additional the cost and effort of bilateral negotiations.

The possibility of similar agreements with other countries to simplify and reduce the cost of taxpayer compliance appears promising. U.S-India APAs regarding intercompany services would seem to be the next logical step, but other scenarios with similarly-situated MNEs represent further opportunity for APA process improvement.


Transfer pricing has never been a static field, and recent global trends have significantly increased the uncertainty inherent in establishing appropriate intercompany pricing. Because of this increased uncertainty, the calculus formerly used to determine the benefits of an APA relative to the costs has changed. Several external factors now need to be taken into account, including increased enforcement, new guidelines and disclosure requirements, tax reform and tariffs, and potential departures from the arm’s-length standard through digital taxes. In addition, various changes within the APMA Program need to be considered, including abbreviated APA requests for certain types of APAs, the impact of front-loading information in the APA process, reference sets, and coordinated unilateral APAs.

Moreover, under certain circumstances, an APA can provide a taxpayer with support for its transfer pricing in multiple jurisdictions at once. The sum of those changes extrinsic and intrinsic to the APMA Program have likely made an APA the most cost-effective and efficient path for many taxpayers who formerly declined to pursue an APA based on cost. For taxpayers that already have an APA, a renewal APA will continue to provide benefits, likely at significantly lower costs relative to the original APA.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Matthew Kramer is Transfer Pricing Managing Director for the West Region and is based in San Francisco; Steven C. Wrappe is the National Technical Leader of Transfer Pricing in Grant Thornton’s Washington National Tax Office and an adjunct professor at New York University School of Law; Matt Piper is a Transfer Pricing Senior Manager for the Central Region and is based in Minneapolis.

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