The US IRS cut the median time to complete advance pricing agreements (APAs) down to 32.7 months in 2020, a drop of over six months from last year, its best completion time in five years, IRS statistics published on March 30 reveal.
The APA backlog was 448 as of December 31, 2020, however, which is only slightly less than the previous year’s backlog, according to the statistics, published in IRS Announcement 2021-6.
APAs are binding agreements between the IRS and a multinational group taxpayer that are designed to resolve future year transfer pricing issues. Often one or more foreign governments are also a party to an APA agreement.
APAs executed in 2012 totaled 127, an improvement over the annual output of the previous six years. A total of 120 APAs were executed in 2019, 107 in 2018, 116 in 2017, 86 in 2016, 110 in 2015, and 101 in 2014. In 2012 and 2013, the IRS had a higher yearly output, with 140 and 145 APAs executed in those years, respectively.
About 60 percent of APAs executed in 2020 were renewals, as was the case in the four previous years.
APA backlog
According to the statistics, IRS’s APA backlog was 448 as of December 31, 2020, only slightly less than last year’s backlog of 454 APAs and 2018’s backlog of 458 APAs.
On December 31, 2017, the backlog was much lower, with only 386 APAs pending. The IRS attributed the increased backlog in 2018 to a surge in applications that year.
The IRS said that as of December 31, 2020, 25 percent of the unresolved bilateral APAs involved Japan, while 20 percent involved India and 11 percent involved Canada.
Time to complete/new applications
The median time required for the IRS to complete an APA in 2020 was 32.7 months. This was a notable improvement over the 2019 and 2018 figures, where the median time to complete was 38.8 and 40.2 months, respectively. In 2017, 2016, 2015, and 2014, the median time to complete was 33.8 months, 32.8 months, 31.9 months, and 35.3 months, respectively.
The IRS stats also reveal that in 2020, a total of 121 new APA applications were filed, the same as in 2019 and far fewer than the 203 applications filed in 2018. According to IRS data, in 2011–2017, new APA applications numbered 96, 126, 111, 108, 183, 98, and 101, respectively.
Of the 121 new APA applications filed in 2020, 15 were unilateral, 103 were bilateral, and three were multilateral.
As in prior years, the largest number of bilateral APA applications involved Japan, with 41 percent involving that country. This was followed by bilateral APAs involving India, which comprised 11 percent, and Canada, which comprised 10 percent.
US transfer pricing methods
Most transactions covered in APAs executed in 2020 involved the sale of tangible goods or the provision of services. Almost a quarter (24 percent) addressed the use of intangible property. This is broadly consistent with prior years.
Of APAs executed in 2020 that involved transfers of tangible and intangible property, 84 percent used the comparable profits method/transactional net margin method (CPM/TNMM). Of those, 69 percent used operating margin as the profit level indicator.
For service transactions, the CPM/TNMM was used 85 percent of the time, with operating margin and operating profit to operating expense being used as the profit level indicator in 57 percent of those cases.
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