Panelists Address New Approaches to Increasing Efficiency of U.S. APAs
At the first annual Transfer Pricing Conference in Washington on June 8, current and former IRS officials explained recent initiatives in the Advance Pricing Agreement Program (APA). The panelists concluded that despite significant processing delays, obtaining an APA can prevent future complications with double taxation, tax evasion, and uncertainty over transfer pricing methods. Practitioners questioned whether the program can remain effective when limited resources and increased applications have lengthened the processing time.
Advance Pricing Agreement Program
The Advance Pricing Agreement Program, implemented in 1991, is designed to resolve actual or potential transfer pricing disputes under IRC § 482 in a cooperative manner. An APA is a binding contract between the IRS and a taxpayer whereby the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its tax return for a covered year consistent with the agreed transfer pricing method.
From 2000-2007, the APA Program averaged 91 applications per year. Applications sharply increased in 2008 and maintained momentum through 2010 with 144 applications, representing a new one-year high for the Program. The APA Program expects APA applications to continue in 2011.
The APA process is a lengthy one. The process can be broken into five phases: (1) application; (2) due diligence; (3) analysis; (4) discussion and agreement; and (5)
drafting, review, and execution. Determinations are made on a case-by-case basis rather than by category. The APA team must satisfy itself of highly complex factual issues before reaching an advance agreement with a taxpayer; as a result, the due diligence and analysis stages can span a staggering number of months.
The average time to complete a new APA for a small business is 40.7 months, 33.1 months for a renewal. Although the IRS expedites APA processing for small businesses, these cases require nearly the same amount of time and resources to analyze the highly factual, novel transfer pricing issues. Consequently, many taxpayers are opting to forgo the process.
At the June 8 conference, former APA director John Hinding discussed IRS initiatives to reduce processing times amid restricted resources. Some of these initiatives include pooling resources with other competent authority and reducing the number of participants required at meetings.
In 2005, the IRS Chief Counsel increased specialization within the office by creating five teams of select individuals to handle all cases of a particular type. The purpose was to increase efficiency, quality, and consistency. At the end of 2010, cases within these five categories accounted for 86 of the 243 cases pending in the office.
Read more about the APA Program and its initiatives here.
The attorneys at Fuerst Ittleman have extensive experience in transfer pricing and litigating foreign and domestic tax controversy. If you have a troublesome tax matter on your hands, email us at firstname.lastname@example.org.