The IRS announced this week that fees for Advance Pricing Agreements (APAs) are expected to increase in a two-step process (June 30, 2018 and December 31, 2018).

Background and detailed discussion

An APA is an agreement between the IRS and a taxpayer under which the IRS agrees not to seek a transfer pricing adjustment under Section 482 for one or more specific covered transaction(s) if the taxpayer files its tax return for a covered year based on the agreed transfer pricing method(s) (TPM). The APA process is a voluntary program designed to resolve actual or potential transfer pricing disputes in a principled, cooperative manner, as an alternative to the traditional examination process.

Revenue Procedure 2015-41 provides guidance on the process of requesting and obtaining APAs from the Advance Pricing and Mutual Agreement program (APMA). In particular, Section 3.03 of the Appendix to Revenue Procedure 2015-41 lists the user fee amounts for different types of APAs. In the announcement, the IRS significantly increases the user fee amounts as follows:

Implications

APAs can be a useful tool in managing transfer pricing controversy risk on a unilateral or bilateral basis. Most importantly, they provide certainty and, in a bilateral context, eliminate the potential for double taxation. APAs also remove the risk of potential valuation penalties, substitute for annual transfer pricing documentation and can eliminate the need for uncertain tax position reserves on APA-related transactions. Given these important benefits, the announced increase in APA fees, although not good news for taxpayers, should not be a decisive factor in deciding whether to seek an APA.

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