April 4, 2022
IRS issues annual APA report for 2021
The IRS Advance Pricing and Mutual Agreement (APMA) Program issued the 23rd annual Advance Pricing Agreement (APA) report (the Report) on March 22, 2022, in Announcement 2022-7. The Report discusses APMA, including its activities and structure for calendar year 2021, and gives useful insights into the operation of the APA Program.
The number of APA filings increased in 2021, with taxpayers filing 145 APA requests (up from 121 in 2020). The total number of APAs concluded, however, decreased from 127 to 124 and the median of time to finalize an APA increased from 32.7 months in 2020 to 35.1 months in 2021.
APA applications, executed APAs and pending APAs
Since the APA Program's inception in 1991 through December 31, 2021, the IRS has received a total of 2,936 APA applications and executed 2,191 APAs. The following table reports summary statistics about 2021 APA applications, executed APAs and pending APAs. Data are reported separately for unilateral and bilateral APAs, and completion times for 2021, 2020 and 2019 are compared.
* In some cases, the totals include additional multilateral cases
IRS staffing changes and operating efficiencies
The total number of APMA employees increased during 2021. The number of economists increased in 2021 (25) compared to 2020 (21), and the number of team leaders (a mix of lawyers and accountants) also increased significantly in 2021 (80) from 2020 (64). There were 9 managers and 3 assistant directors in 2021. Each assistant director supervised three managers who lead teams comprised of both team leaders and economists. The IRS APMA contacts are listed here.
Months to complete APAs
The following data indicate that the average time to completion for new bilateral APAs increased from 50.8 months in 2020 to 52.3 months in 2021. The average time to completion for new unilateral APAs decreased significantly from 36.2 months in 2020 to 24.5 months in 2021.
Treaty partners in bilateral APAs
As shown in the following chart, APAs with Japan represent more bilateral APAs than any other country at 40% of bilateral APAs executed in 2021. This is attributable to the maturity of the APA Programs in the United States and Japan and the negotiating experience of the APMA team and the competent authority team representing the National Tax Administration of Japan.
Canada is the third most frequently involved treaty partner in executed APAs in 2021 at 7%, as a result of its role as the third largest trading partner with the US (following China and Mexico) and the fact that it has been a US tax treaty partner for almost 80 years.
In addition, the number of India APA requests filed continues to increase steadily, in part as a result of the improved relationship between the IRS and India's tax authorities during the last several years. In 2021, India represented 16% of bilateral APAs filed, 22% of pending bilateral APAs and 5% of executed bilateral APAs (second only to Japan in all three categories). This constitutes an extremely positive outcome given the uncertainty and risk of double taxation faced by multinationals investing in India.
Bilateral APAs filed per country2
Bilateral APAs executed by country
As shown in the following chart, manufacturing and wholesale/retail trade continue to comprise the largest share of APA cases, representing 75% of all APAs completed in 2021.
Approximately 70% of manufacturing cases involved computer and electronic products, chemicals and transportation equipment, while the wholesale/retail trade cases were dominated by wholesalers of durable goods (62%).
Covered transactions and tested parties
The Report describes, in overall terms, the covered transactions and sets out the types of tested parties in each transaction. Note that one APA may cover more than one transaction.
Types of tested parties
Transfer pricing methods applied
The CPM/TNMM continues to be the most commonly applied method (65%) in cases involving transfers of tangible and intangible property, as well as for services transactions.
A critical assumption is a fact on which the taxpayer's TPM depends. APAs typically list critical assumptions that involve a particular mode of conducting business operations, a particular corporate or business structure, or a range of expected business volume.
The model APA used by the IRS includes a standard critical assumption that there will be no material changes to the taxpayer's business or to its tax or financial accounting practices during the APA term, and all the APAs executed in 2021 included that standard critical assumption.
A few bilateral cases have included critical assumptions tied to either the taxpayer's profitability in a certain year or over the term of the APA, or to the amount of non-covered transactions as a percentage of the taxpayer's revenue.
If a critical assumption has not been met, and the parties cannot agree on how to revise the APA, the APA can be canceled. The IRS did not cancel any APAs in 2021 due to the failure of a critical assumption (or any other reason).
The APA Program's results contained in the Report for 2021 includes the following:
APMA added 20 transfer pricing professionals to its ranks; in addition to its Director, APMA now has 80 team leaders, 25 economists, 9 managers and 3 assistant directors — a total of 118 transfer pricing professionals. The addition of new people may be behind the slower processing times for bilateral APAs.
The upward trend of requests for multilateral APAs continued as the number of multilateral APAs pending in 2021 increased to 27 from 21 in 2020. More taxpayers appear to be looking to multilateral APAs to resolve the multijurisdictional transfer pricing issues wrought by their supply chains. EY also has experience in several cases where APMA or the foreign taxing administration insisted on a multilateral APA rather than multiple bilateral APAs. While multilateral APAs are still less common, there has been a steady increase of such cases over the past several years.
As a result of the COVID-19 pandemic and the constant changes in the global economy and tax landscape, multinationals are continuing to revisit and assess their supply chain impacts and manage their global controversy matters related to their intercompany transactions. Global transfer pricing controversy has increased significantly since 2020. Given the likelihood of tax law changes related to BEPS 2.0 it is critical that taxpayers establish relationships with APMA (and other competent authorities) to understand the nuances of the rules and their application in each jurisdiction. Accordingly, APAs are an increasingly attractive way to obtain transfer pricing certainty in an increasingly uncertain tax environment.
1 The rest consists of transactions between subsidiaries of US and foreign-parented groups, i.e., sister companies (14%).
2 The pie charts in this alert were published in Announcement 2022-7.