The APA programme has received a record number of APA submissions for the third successive year, the programme’s annual statutory report shows.
The annual statutory report, released March 29, reveals that 144 APA requests were submitted during the last calendar year, up once again from last year’s 127 requests. The figures suggest that taxpayers are, more than ever, seeking certainty in their transfer pricing affairs.
Taxpayers thinking about negotiating an APA must weigh the certainty it would offer up against the time, cost and disclosure obligations involved. Now the IRS is looking for greater disclosure on uncertain tax positions (UTP), taxpayers are choosing certainty.
“Financial reporting transparency (US Fin 48), increased tax authority transfer pricing examinations and increased tax reporting requirements (US Schedule UTP) are driving the need for certainty,” said Mike Patton, transfer pricing specialist at DLA Piper in Los Angeles and pioneer of the APA programme in the US. “In addition to the increased interest in APAs over the last few years, many taxpayers that have APAs choose to renew them.”
Other than a desire for certainty, Patton listed the reasons that an APA is sought including: eliminating double tax, retroactively and prospectively; shortening the time to reach a competent authority resolution; reducing the cost of administering transfer pricing, such as annual documentation updates and; obtaining approval for a prospective change in a transfer pricing method that might otherwise be viewed unfavourably if audited with hindsight.
As demand for APA negotiations increased, resources were in shorter supply. The number of staff in the APA division decreased from 39 people at the end of 2009 to 35 people at the end of 2010. Despite this, the number of completed APAs increased to 69 (20 unilateral and 49 bilateral), partly due to the 14.5% increase in the total hours dedicated to APA matters by the APA staff in 2010 (nearly 65,000 hours) compared with the previous year.
The processing time for APAs also remained relatively constant in spite of lower staff levels.
“This speaks well of how the programme is run and the APA personnel,” said Jim Fuller from Fenwick & West.
On whether IRS disclosure initiatives and taxpayers’ desire for certainty have driven the record number of submissions, Fuller said he did not think the two were related: “Taxpayers have always had a need for reasonable certainty in the transfer pricing area, but the increased number of APAs was not so large as to suggest some deep increased need for more certainty.”
“Taxpayers always make a good faith effort to establish valid arm’s-length prices. Nobody wants to buy a lawsuit (an expression one of my law school professors liked to use). There’s nothing new in this regard,” Fuller said.
“The APA programme is a good programme, so it’s no real surprise that there have been a record number of requests again,” Fuller added. “The key will be whether, with the recent turnover at the top, the programme’s personnel will continue to provide the high-quality service the programme is known for.”
In terms of completed APA cases, the report shows that more than 65% of these were inbound cases.
“There were more than twice as many inbound (foreign parent-US subsidiary) APAs than there were outbound APAs,” said Fuller. “This seems generally consistent with past IRS APA reports.”
The most common type of transaction APAs are submitted to cover are those involving the distribution of tangible goods, with the comparable profits method used. There were 40 APAs involving this type of transaction. This too is in alignment with the findings of previous APA reports.
“Most APAs involve relatively routine distribution, manufacturing and service transactions performed by a subsidiary, either US into foreign country or foreign country into US. US bilateral APAs by foreign controlled companies are common as are APAs by foreign banks for global trading of financial products,” said Patton.
Fuller said he expects the number of APA requests to continue increasing, though at a steady rate over the coming years.
“I don’t see anything that will really change this gradual increase over time. From experience, and from what others say, I’d say that the APA folks are doing a good and thorough job at this point,” Fuller said.
Patton was sceptical about a fourth successive year of increased APA applications: “There is a significant backlog in the APA Programme [at the end of 2010, the programme had 350 pending APA requests – 274 bilateral and 76 unilateral] and IRS has placed restrictions on the use of unilateral APAs, which may lead toward a levelling off of new APA applications. However, we regularly are having discussions with companies interested in seeking new APAs, so it is possible the trend will continue.”
