Are you considering an advance pricing agreement? Companies need to conduct benefit analysis to determine if APA is best approach.

• Author: Wrappe, Steven C.
• Position: TAX STRATEGY

In 1991 the Internal Revenue Service (IRS) established the Advance Pricing Agreement (APA) program, allowing a taxpayer to request that the IRS, and potentially other countries, prospectively approve its transfer pricing facts, transfer pricing methodology, and arm's-length range of results. The certainty provided by this prospective approach, combined with the attendant potential time and cost savings, has been attractive to many companies. The APA process has become the dispute resolution process of choice for difficult transfer pricing issues.

The transfer pricing landscape has changed considerably in the quarter century since the APA program was launched. Although an APA will not make sense for every company, substantial increases in global transfer pricing enforcement and the anticipated transfer pricing disputes from changes created from Base Erosion and Profit Shifting (BEPS) have made APAs more desirable than ever before. Further, IRS changes to the APA program structure, staffing, and procedures are expected to improve the APA process. The increased desirability of APAs is already reflected in a substantial recent increase in taxpayer requests for APAs--by September 2015, taxpayers had already filed as many APA requests as were filed in all of 2014. (1)

Is an APA right for your company? Two types of factors influence every company's decision whether to pursue an APA:

* The company-specific factors that make an APA more or less appropriate.

* The specific benefits that a company is seeking through the APA process.

Relevant company-specific factors include the company's industry, risk tolerance, involved countries, type of issues, and examination history. Most companies are seeking certainty (freedom from penalty, double tax, tax adjustment, or tax reserves), as well as time and cost savings over the regular examination and dispute resolution process. Companies also need to consider whether to seek a bilateral APA (involving the IRS, another tax authority, and the taxpayer) or a unilateral APA (only involving the IRS and the taxpayer). Further, the opportunity to use a bilateral APA as a benchmark for similar intercompany transactions within the multinational group is a benefit newly available to a larger set of companies. The weight assigned to these (and other) factors will vary significantly from company to company.

Impact of Recent Changes to Global Enforcement, APA Process

Each year more countries initiate active transfer pricing enforcement, inevitably increasing the number of transfer pricing disputes. The global inventories of disputes between treaty partners, largely composed of transfer pricing issues, have increased over sixty percent in four years, from 3,328 cases in 2010 to 5,423 cases in 2014. (2) Further, the Organisation for Economic Co-operation and Development (OECD) has acknowledged that the BEPS-related changes to transfer pricing, especially the country-by-country (CbyC) reporting requirements, are likely to produce a large incremental increase in the number of transfer pricing disputes between treaty countries. (3)

The IRS' APA program and process has undergone significant changes over the last five years in an effort to enhance its effectiveness. In 2012, the APA program moved to the IRS Large Business and International (LB&I) division and merged with the competent authority (CA) function to create the Advance Pricing and Mutual Agreement (APMA) program. This...