IRS issues 11th annual APA report
The Internal Revenue Service (IRS) on 29 March released Announcement 2010-21, the Advance Pricing Agreement (APA) annual report covering the activities of the APA program during calendar year 2009. The annual report is issued under §521(b) of Pub. L. 106-170, the Ticket to Work and Work Incentives Improvement Act of 1999, which requires the Secretary of the Treasury to report annually to the public on APAs and the APA program.
The annual report provides a brief summary of recent developments in the APA program and a statistical snapshot of the APA program's activities during 2009.
The report notes that for existing APAs, the APA program has adopted a general policy not to reopen closed cases, absent a special Critical Assumption on point, and that on pending applications, it has dealt with down-economy issues on a case-by-case basis. Whether or not a special "down-economy adjustment" might be appropriate depends on a variety of factors, including whether or not the tested party and the comparables have been similarly affected by the downturn, the tested party's historic risk profile and performance, and a taxpayer's willingness to accept a symmetrical adjustment (in a renewal APA) when the economy improves. Approaches that have been considered include changing the APA term, waiting for more current financial data, using a different set of comparables, and/or applying a longer testing period. This is consistent with the authors' experience.
Highlights of the APA annual report are as follows:
- Requests for Advance Pricing Agreements (APAs): For the second year running, the IRS received a record number of APA applications (39 unilateral and 88 bilateral, for a total of 127) in 2009. We believe this shows a continued reflection of taxpayers' views that the certainty provided by an APA has become more valuable in light of both growing U.S. and foreign audit risks and FIN 48 disclosure requirements. Interestingly, approximately 10 submissions invoked APA jurisdiction under Rev. Proc. 2008-31, which specifically included the attribution of profits to a permanent establishment (PE) among the issues that may be resolved through an APA.
- Completed APAs: The IRS executed 63 APAs (21 unilateral and 42 bilateral) in 2009, compared with 68 in 2008. Total APA staffing measured by hours increased in 2009 from 2008, even though there was a significant amount of staffing fluctuation throughout the year. Renewal APAs represented 28 of the 63 APAs executed (8 unilateral and 20 bilateral), which shows taxpayers' satisfaction with the APA program.
- APA inventory: The APA program had 222 cases in active inventory at the end of 2009 that were either unilateral APAs (57 cases) or bilateral APAs for which the APA Program had not yet completed a recommended negotiating position paper (165 cases). Not surprisingly, given the increase in APA applications and the number of executed APAs during the past two years, this is a significant increase from the 161 and 105 cases in active inventory at the end of 2008 and 2007, respectively.
- APAs withdrawn: Fourteen APAs were withdrawn in 2009, a significant increase from the six APAs withdrawn in 2008 and five Advance Pricing Agreement (APA) withdrawn in 2007.
- Months to complete APAs: In 2009, the median time to complete a unilateral APA was 18.2 months, and 40.6 months for a bilateral Advance Pricing Agreement (APA), compared to 19.2 months and 35.9 months, respectively, in 2008. Interestingly, the median processing time for all renewals was very similar to that for all new APA requests (31.4 vs. 33.6 months, respectively).
- Inbound v. Outbound: Inbound cases continued to account for the large majority of the Advance Pricing Agreement (APA) program's caseload in 2009, with approximately 74 percent of the APAs executed involving foreign multinationals with U.S. subsidiaries.
- Cost sharing APAs: The IRS completed three or fewer cost sharing and/or buy-in APAs in 2009, and three or fewer recommended negotiating position papers for bilateral cost sharing/buy-in cases were sent on to Competent Authority. The APA program is currently working on nearly 10 cases involving cost sharing/buy-ins, split almost evenly between bilateral and multilateral APAs. The methods used in the completed and pending cases include valuations based on the income method, including cases involving a split of the discounted present value of platform contributions made by two or more parties, and other types of analyses.
- Small business taxpayer APAs: Five small business taxpayer APAs were executed in 2009 (two unilateral and three bilateral).
- Transfer pricing methods: The comparable profits method using the operating margin profit level indicator was used to evaluate approximately 30 percent to 34 percent of the transactions involving tangible and intangibles. Comparable uncontrolled transactions (CUTs) were used approximately 5 percent of the time.
- Boilerplate and balance sheet adjustments: The annual report also includes the latest version of the APA program's boilerplate APA agreement and formulas for balance sheet adjustments.
In a related development, the IRS is in the process of revising Rev. Proc. 2006- 9 (the revenue procedure that explains how taxpayers may request an APA, the manner in which the request will be processed, and the effect and administration of APAs), and we expect a new revenue procedure to be issued shortly.