The US has been a leader in transfer pricing enforcement for several decades, and one of the tools it uses is the advance pricing agreement (APA) program. This program is managed by the Advance Pricing and Mutual Agreement (APMA) program within the Large Business and International Division of the IRS. The legal basis for the APA program is Revenue Procedure 2006-9, and the process for negotiating an APA is set forth in Rev. Proc. 2015-41.
Rev. Proc. 2015-41 provides guidance on the process of requesting and obtaining APAs from the APMA program. The procedure lists specifications for APA requests and includes provisions for pre-filing meetings and a pre-filing Memorandum. The pre-filing process allows taxpayers to discuss their APA request with the IRS and ensure that all necessary information is provided. The procedure also allows for rolling back an APA to earlier years, even where this has not been requested by the taxpayers.
The US has also entered into unilateral APAs with the Large Taxpayer Division of Mexico’s Servicio de Administración Tributaria (SAT) for US taxpayers with maquiladora operations in Mexico. These agreements ensure that taxpayers will not be exposed to double taxation.
In May 2018, the IRS issued a new template for APA requests under Rev. Proc. 2015-41. This version of the template provides taxpayers with some scope for editing critical assumptions used in their request. Additionally, in February 2019, the APMA released an Excel-based financial model to be used in reviewing certain APA requests. The Functional Cost Diagnostic Model analyzes the costs incurred by each related party in the transactions and calculates a pro forma profit split, which is compared to the outcome of the transfer pricing method used in the APA request.
However, the US has faced some challenges in its cross-border tax dispute resolution procedures. The OECD published a stage 2 peer review report in August 2019 assessing the extent to which the US is improving its procedures. The report revealed that the US did not meet a recommended 24-month average timeframe to close mutual agreement procedure (MAP) cases during 2016/17. The average time to close a US MAP case in that year was 27.17 months. Additionally, some US tax treaties omit a recommended provision stating that mutual agreements should be implemented notwithstanding time limits in domestic law, and 25% of US tax treaties do not provide that competent authorities should consult to relieve double taxation in cases not provided for in the treaty.
Despite these challenges, the APA program continues to be an effective tool for US taxpayers seeking certainty in their transfer pricing arrangements. The APMA issued its annual APA report for 2020 on 23 March 2021, which revealed that there were 127 completed APAs in 2020, with a 59% renewal rate. Most of the transactions covered in APAs executed in 2020 involved the sale of tangible goods or the provision of services, and approximately 25% of transactions involved the use of intangible property. The median time required to complete an APA in 2020 was 32.7 months, reduced from 38.8 months in 2019. The most frequently used transfer pricing method in 2020 for both the sale of tangible property and the use of intangible property continued to be the comparable profits method/transactional net margin method (CPM/TNMM).