IRS APA and APMA Stats Announcement: Summary and Implications for International Clients Seeking Tax Certainty

Introduction

The Internal Revenue Service (IRS) released Announcement 2024-16, which provides an annual report on the Advance Pricing Agreements (APAs) and the Advance Pricing and Mutual Agreement Program (APMA Program) for the calendar year 2023.

Key Highlights

• The number of executed APAs in 2023 increased by 102.59% compared to the executed APAs in 2022;
• The average time to complete new and renewal APAs in 2023 was approximately 42 months (down from 43.4 months in 2022);
• The IRS noted that the use of intangible property is among the most challenging transactions in APMA’s inventory (18% of the covered transactions);
• The comparable profits method/transactional net margin method (CPM/TNMM) was the most used transfer pricing method, particularly for transactions involving the sale of tangible and intangible property (80% for these types of transactions);
• The IRS is investing more money and resources in the APMA Program as it seeks to: (i) optimise completion timelines; and (ii) provide taxpayers with more certainty in their transfer pricing policies.

"The statistics align with our experience on the ground - the IRS is open for business. With the increased IRS resources, we expect the average time to complete an APA will continue to trend downwards and with more businesses seeking tax certainty, applications are likely to rise as a result of taxpayers’ uncertainties arising, among others, from the implementation of the OECD’s Pillars One and Two initiatives, especially the application of Amount B to “routine” distribution activities." – Michael Patton, Rita Tavares de Pina

International perspective

"From a UK and European perspective, as the US is a key market for many of our clients, these statistics are heading in the right direction for those seeking tax certainty in the ever-changing complex world of transfer pricing.

In fact, they tell a similar story to the UK tax authorities APA statistics, as we have previously discussed. The increase in applications mirrors what we are seeing in the market where clients strive for tax certainty and dispute prevention with a preference to protect challenging material transactions with the tax authorities via an APA over an enquiry. There is also a common trend in tax authorities around the world that indicates their willingness for negotiating more APAs. HMRC, particularly, seems to be more open to working proactively with taxpayers in concluding APAs to prevent double taxation." – Randall Fox, Ravi Ahlawat

APMA Program Overview:

1. Structure and Composition: As of 31 December 2023, the APMA Program was managed by 70 team leaders, 29 economists, 12 managers, and 3 assistant directors. This means that the IRS increased the staff from 97 (end of 2022) to 114 in 2023. There was also an expansion in the offices dealing with the APMA Program, including now the Atlanta, Boston, Denver, Miami and Seattle metropolitan areas too.

2. Statistical Data:

3. Industry Breakdown: The APAs executed spanned various industries, with the majority in manufacturing, wholesale/retail trade, and services.

4. Countries involved: the highest countries with bilateral APA closures were: Japan (32%), India (17%), Italy (11%), Canada (8%), Korea (6%), United Kingdom (6%), Denmark and Switzerland (3%).

5. Covered years: taxpayers can request an APA for prospective taxable years as well as the APA to be rolled back to cover one or more earlier taxable years.

6. Compliance: Taxpayers are required to file annual reports demonstrating compliance with the terms of their APAs, which are critical for ongoing monitoring by the APMA Program.

Implications for Clients Seeking Tax Certainty

The APA program provides significant benefits for multinational enterprises seeking tax certainty. By entering into an APA, businesses can achieve:

• Predictability: APAs offer a clear agreement on transfer pricing methods and compliance requirements, reducing the risk of future disputes with tax authorities.
• Reduced Audit Risk: With an APA in place, businesses are less likely to face extensive audits related to transfer pricing, as the terms and methods are pre-approved by the IRS. Moreover, the discussions take place with a global team of highly skilled professionals specialised in transfer pricing.
• Stability: APAs provide long-term stability in tax planning, typically covering multiple years and allowing businesses to focus on strategic operations without the uncertainty of fluctuating tax liabilities.

How DLA Piper Can Help

At DLA Piper, we specialise in providing comprehensive tax advisory services tailored to the needs of multinational enterprises. Our expertise in navigating the complexities of the APA process ensures that our clients can achieve the benefits of tax certainty and compliance. We offer:

• Expert Guidance: Our team of tax professionals with former tax authority experience can assist in preparing and filing APA requests, ensuring thorough and accurate documentation.
• Strategic Planning: We help clients develop robust transfer pricing strategies that align with their business operations and comply with regulatory requirements.
• Ongoing Support: We provide continuous support throughout the APA term, including assistance with annual compliance reports and responding to any IRS inquiries.

By partnering with us, clients can navigate the APA process with confidence, securing favourable outcomes and minimising tax risks. Contact us today to learn how we can help you achieve tax certainty through an APA.