IRS APA Report Doesn’t Prove Increased Selectivity With Requests

The IRS’s 2023 public report on advance pricing agreements and the advance pricing and mutual agreement program, released last week, is worth examining for what it says about the program’s performance and what it might indicate to potential APA applicants.

Given the certainty that APAs provide and what appears to be improving processing times for new agreements, companies will want to take advantage of the chance to get an APA. The first question on many observers’ minds, then, is whether the program will remain broadly accessible for interested companies.

More Selective?

An IRS official said in 2022 that the agency was aiming to make the APA program more “selective.” The following year, the Large Business and International Division published a memorandum on the “Interim Guidance on Review and Acceptance” of APA submissions.

The memorandum stated that to “ensure taxpayer and tax administration resources are used as effectively as possible,” the APMA was “providing an early mechanism for identifying potential roadblocks” by assessing whether a case was suitable for an APA via an optional pre-submission review and a mandatory post-submission review. Some practitioners expressed concerns about whether the IRS would use the reviews to turn away more applicants.

Signs point to an increased demand for the certainty that APAs provide. In that regard, the 2023 report—as the first one issued after this new guidance—is worth analyzing for evidence that the procedures described in the memorandum have affected the APA numbers.

Nothing in the report definitively indicates increased selectivity, but there are a couple of things worth noting. First, the number of APA requests filed in the year decreased slightly in 2023—from 183 in 2022 to 167 in 2023. This may reflect that some taxpayers didn’t file a request after pre-submission discussions under the new procedures. But those figures haven’t always grown, and there are other viable explanations for that drop.

Second, the report provides some positive news regarding staffing, indicating that the APMA APA team expanded to 114 (up from 97 at the close of 2022) and that the processing times for new APAs also improved in 2023 (with a drop in the average and median number of months to complete new bilateral APAs).

Perhaps those improvements portend a more inclusive approach in taking cases; greater resources should mean that the APA program has more bandwidth.

Other Notable Data

Potential applicants should consider several other details in the report on executed APAs. The 2023 data about the countries, industries, taxpayers, covered transactions, and pricing methods most frequently represented in executed bilateral APAs are generally consistent with recent APA reports:

• Japan or India was on the other side in about half of APA cases. Canada, Italy, South Korea, the UK, Mexico, and Germany were well represented.
• The manufacturing and wholesale/retail trade industries have the highest number of APAs.
• More APAs involve a foreign parent with a US subsidiary than the other way around.
• Most of the transactions covered in APAs involve the provision of services or the sale of tangible property—23% involve the sale of tangible property into the US; 13% involve the sale of tangible property from the US; 23% involve services provided by a foreign entity; and 21% involve the provision of services by a US entity.
• The comparable profits method is the most commonly used transfer pricing method for sales of tangible property and the use of intangible property—it was used 80% of the time. The most common profit-level indicator used under that method was operating margin.

Future reports will be helpful in assessing whether the APA review processes described in the 2023 memorandum has any effect. Even if the program has become more selective, which the latest data doesn’t prove, the certainty (both prospectively and for rollback years) provided by an APA still likely makes the efforts worthwhile.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Amanda Pedvin Varma is partner at Steptoe and advises clients on international tax planning, controversy, and policy issues.

Steven R. Dixon is partner at Steptoe and has represented corporate taxpayers in large-dollar transfer-pricing disputes in the US Tax Court, at IRS Appeals, and on audit.

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