Surprisingly Good IRS APA Annual Report With Strong U.S.-Japan Results

The Internal Revenue Service recently released its annual “Announcement and Report Concerning Advance Pricing Agreements” (annual report) for 2020, and the results were surprisingly good. The Covid-19 pandemic eliminated the site visits, travel and face-to-face negotiations that have characterized APA negotiations for 30 years, forcing the IRS and its treaty partners to adjust to working from home and relying on electronic documents and web conferences to negotiate cases. Not to mention, because the annual report does not, the outsized impact of the pandemic on the transactions and results of MNCs pursuing APAs and the comparable companies.

In spite of these challenges, the U.S. Advance Pricing and Mutual Agreement Program (APMA) reported statistics for 2020 that are actually slightly better that the previous, non-pandemic year. Further, despite volatile profitability, time differences, and lack of face-to-face dealing, U.S.-Japan cases continue to be requested and resolved in much higher volumes than other countries.

THE 2020 ANNUAL REPORT

The IRS is required to publish this report annually, reporting on the structure, composition and operation of the APMA Program; statistical data; and various elements of APAs executed. Since 2013, the annual report has presented country-specific information regarding APA requests, inventory and executions.

APA Applications Filed

Table 1

Bilateral APAs by Country

Table 1 shows the same number of complete applications filed, 121, in 2019 and 2020. There were no major changes in APA applications for unilateral and bilateral APAs. The number of user fee filings was 29 in 2019 and 25 in 2020.

The bilateral APA applications by country show that Japan’s share increased by almost 10% from 2019 to 2020. Given that Japan-based MNCs account for the largest share of bilateral APA applications, it appears that the pandemic has provided additional incentive to apply for APAs to address the uncertainty caused by the pandemic.

Executed APAs

Table 2

APAs Executed by Country

The total number of executed APAs increased from 120 to 127 (6%) from 2019 to 2020. The number of executed bilateral APAs increased from 91 to 105 (15%) from 2019 to 2020. Interestingly, the number of Japan bilateral APAs executed increased almost 40% from 47 to 66 from 2019 to 2020.

The share of executed renewal APAs was 57% in 2019 and 59% in 2020. It is therefore important to recognize that the APA program is significantly comprised of renewal APAs. The number of executed renewal APAs increased from 68 to 75 (10%) from 2019 to 2020. The number of executed renewal bilateral APAs increased almost 33% from 48 to 64 from 2019 to 2020.

Although there is no data for the number of Japan renewal bilateral APAs executed, the increase in Japan bilateral APAs executed may account for the increase in executed renewal bilateral APAs, since Japan-based MNCs are the largest users of APAs. When looking at the percentage of executed bilateral APAs by country, Japan’s share increased from 49% to 52% from 2019 to 2020. Given that Japan-based MNCs account for the largest share of bilateral APA applications, it appears that the pandemic provided additional incentive for them to apply for APAs.

It is noteworthy that India was included in “All Other Countries” in 2019 but moved up to the second spot at 11% in 2020. This significant shift for India bilateral APAs reflects the recent increase in bilateral requests with India and that bilateral negotiations have begun to work more smoothly between the U.S. and India.

Pending APAs

Table 3

Pending Bilateral APAs by Country

The overall inventory of pending APAs decreased by six (1%) from 2019 to 2020. The number of pending bilateral APAs decreased by two from 2019 to 2020. Interestingly, the number of pending Japan bilateral APAs decreased by from 127 to 112 (12%) from 2019 to 2020.

The top three countries, Japan, India and Canada, showed almost no change in their share of pending APAs from 2019 to 2020. The relatively smaller share of pending Japan bilateral APAs, compared to the shares of Japan APA applications and executed Japan APAs, shows that the IRS and Japan’s National Tax Agency maintain a good working relationship and are moving APAs quickly.

Months to Complete Executed APAs

Table 4

New APAs takes considerably more time to complete than renewal APAs. New bilateral APAs took 45.9 months in 2019 and 43.7 months in 2020 (median), while renewals took 38.7 months in 2019 and 30.3 months in 2020 (median). Similarly, for unilateral APAs, new ones took 33.2 months in 2019 and 35.3 months in 2020 (median), while renewals took 28.7 months in 2019 and 21 months in 2020 (median).

Interestingly, the biggest improvement in months to complete occurred in renewal APAs between 2019 and 2020 for both bilateral and unilateral cases. This improvement may be in part due to the increased resources the APMA acquired in 2020.

Other Mentions and Omissions

No APAs were revoked or canceled in 2019 or 2020. The number of withdrawn bilateral applications actually declined from 11 to five from 2019 to 2020, consistent with the increased value of certainty through APAs during the highly uncertain times caused by the pandemic.

As of Dec. 31, 2020, the APMA Program was composed of 64 team leaders, 21 economists, nine managers, and three assistant directors. From Dec. 31, 2019, APMA increased its number of team leaders by 12, and economists and managers by three. The increased resources may have contributed to the number of APAs executed and shortened time to execute as compared to 2019.

Given the enormous impact of the Covid-19 pandemic across all countries and industries, and the APA process itself, it is surprising that the annual report makes no mention of the pandemic in the annual report. Recent comments by APMA officials that few taxpayers attempted to support APA revisions with pandemic impacts is consistent with these results. However, the movement away from in-person site visits, conferences, and negotiations surely had an impact on the APA process.

CONCLUSION

Overall, the statistics show little outward variation between 2019 and 2020—no major change in APA applications, executed APAs, and pending APAs between 2019 and 2020. However, this apparent normalcy belies the tumultuous global economy and the substantial changes to the APA process. The continued APA applications really indicate that the need for certainty in volatile times has fueled a strong motivation to seek APAs. The slightly improved APA executions really demonstrate that a robust APA process has been able to surmount substantial obstacles raised by the pandemic. Particular success has been enjoyed with regard to U.S.-Japan cases where the U.S. has the most experience with the treaty partner.

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

Author Information

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; Harumi Yamada is a Partner, Transfer Pricing in Tokyo; and Shinichi Tsutsui is Director, Transfer Pricing in Washington, DC, and Transfer Pricing Leader in the Japanese Business Group.

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