On March 22, 2024 the IRS’s Advance Pricing Mutual Agreement Program (“APMA” or the “Program”) released Announcement 2024-16 which provides their annual Advance Pricing Agreement (“APA”) report (the “Report”), and the statistics show a record-breaking result for 2023 – 156 APAs resolved. APMA resolves actual and potential transfer pricing disputes and other competent authority matters through United States’ bilateral income tax conventions. This Report focuses on APAs (a solution to prevent future transfer pricing disputes) during calendar year 2023 and provides statistical information about the APA applications received and resolved, including countries involved, types of transactions, and transfer pricing methods. Key takeaways and our observations are noted here.
Number of Executed APAs and APMA Headcount Increased
The record high completion of 156 APAs is the clear highlight from the 2023 statistics, especially because it shows a significant rise from the total number of APAs executed from the previous year. (Only 77 APAs were executed in 2022.) The statistics show that executed APAs included 24 unilateral APAs, 130 bilateral APAs, and 2 multilateral APAs. The median completion time for all executed APAs (originals and renewals) was 42 months, a slight decrease from 43.4 months in 2022.
It is unclear if the high number of executed APAs is due to resolving backlog from the prior year and/or other factors. However, we note that the statistics show a significant increase in APMA staffing in 2023. APMA’s APA cases were handled by 70 team leaders, 29 economists, 12 managers, and 3 assistant directors. The table below provides a comparison and shows that there was an overall increase of 17 staff members in 2023.
This headcount increase seems consistent with IRS officials’ messaging last year to use their new funding from the Inflation Reduction Act, in part, to hire staff across the agency, including within APMA. Moreover, the increase of 3 managers correlates to APMA’s recent reorganization that added 3 new teams, each receiving responsibility for a new grouping of countries.
Bilateral APAs Dominated by Japan and India, but Italian APAs are Increasing
The Report shows that APMA continues to negotiate bilateral APAs with a broad range of countries. Japan (32%) continues as the primary bilateral treaty partner for executed APAs, followed by India (17%), Italy (11%) and Canada (8%).
A notable development shows bilateral APAs with Italy are on the rise. There was a significant increase in executed APAs involving Italy (11% in 2023 compared with 4% in 2022), as well as APAs involving United Kingdom (6% in 2023 compared with 3% in 2022).
APA Terms Maintain Prospectivity
Since APAs are designed to prevent future transfer pricing disputes, an APA term with prospective years is key. (Taxpayers can also request “roll back” years.) Accordingly, Revenue Procedure 2015-41 asks taxpayers to request a term with five prospective years, and in practice, this term is often extended to account for the evaluation period and maintain five prospective years when the APA is finally executed.
The Report shows that APA term lengths in 2023 averaged six years including roll back years, with the largest number of APAs (70) executed with a five-year term. Of all APAs in 2023, the total terms ranged from two to 14 years.
Demand for APAs Decreases Slightly
As for the pipeline, there was a dip in the number of APA applications filed. The number of new APA applications in 2023 was 167 (as well as 22 user fee filings not yet accompanied by an APA request). This is a decrease from 2022 when APMA received 183 new APA applications (as well as 34 user fee filings not yet accompanied by an APA request).
Other Highlights
Other highlights for 2023 include:
- Majority of the APAs involved transactions between a foreign parent and a US subsidiary;
- Manufacturing and wholesale/retail trade industries made up the majority of APAs executed;
- Most transactions involved the sale of tangible goods (33%) or the provision of services (44%), but 18% involved the use of intangible property, noted in the Report as the most challenging transactions in APMA’s inventory; and
- Comparable profits method/transaction net margin method continues to be the most commonly applied transfer pricing method for tangible and intangible property transactions.
APA Process Continues to be an Effective Forum
In our view, APAs continue to be the optimal solution for preventing and resolving transfer pricing disputes and obtaining certainty. APAs are particularly meaningful with challenging intercompany pricing issues because they allow taxpayers to avoid lengthy and aggressive audits that can lead to litigation or resolution through a tax treaty’s Mutual Agreement Procedure clause. While the reported average and median times to conclude APAs can seem long, it is often possible to conclude APAs in significantly less time by taking a strategic, proactive approach to the process, and maintaining open lines of communication with both APMA and the foreign competent authority. Further, APMA’s willingness to entertain a term extension to ensure reasonable prospectivity (coupled with the opportunity to renew the APA) means that potentially lengthy processes can often make sense from a cost-benefit perspective particularly in comparison to the alternatives.