Are You Considering an Advance Pricing Agreement?
Companies Need To Conduct Benefit Analysis To Determine If APA Is Best Approach

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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 move, coupled with substantial new hiring, increased staffing to fifty-five team leaders and twenty-six economists responsible for APA and CA cases by the end of 2012.4 To speed resolution of APAs, the APMA program has recently hired eleven new team leaders and two additional economists.5 Under Rev. Proc. 2015-41, which updates APA procedures, a taxpayer may be required to expand its APA request to cover interrelated issues and extend the statute of limitations.6 The required content of APA requests has been front-loaded, and the taxpayer may also be required to submit a prefiling memorandum or have a prefiling conference prior to filing the APA request.7 These changes are not expected to materially increase taxpayer efforts and should allow APMA to efficiently make decisions with respect to the case.

These global and U.S. developments are expected to have a strong positive effect on the desirability of the APA process. The increased global enforcement and BEPS CbyC reporting is expected to have the largest impact, by increasing the risk of transfer pricing examination and double taxation. Further, recent changes to the APMA program and the APA process are expected to improve efficiency, thus increasing APA desirability.

Company-Specific Factors

The ease with which a company can pursue an APA and the overall benefit that company can achieve through the APA process is influenced by a number of company-specific factors.

Company’s Industry

The industry in which the company operates usually has some effect upon the decision whether to pursue an APA. Some industries, notably automotive and pharmaceutical, are encouraged by the inherent size and uncertainty of transfer pricing outcomes to seek the certainty of an APA to avoid the negative effects of uncertainty. Other industries (e.g., electronics) are encouraged by the relatively high levels of experience of the IRS’ APMA program and other tax authorities with the industry and its issues.8 Industries where the governments have little or no experience may be less inviting, because the initial APA in an industry may require more time and effort to complete.

Company’s Risk Tolerance

The risk tolerance of the company’s management strongly affects the decision whether to pursue an APA. Given the cooperative nature of the APA process and the information requirements, companies with arguably aggressive transfer pricing positions should likely avoid the APA process. The APA process works best with taxpayers that have taken more middle-of-the-road positions but still value the benefit of certainty around those positions.

Involved Countries

The involved countries, and the negotiating relationship between those countries, can sometimes affect the decision whether to pursue an APA. Unless a treaty exists, no bilateral APA would be possible. A lack of negotiating experience between the affected countries may indicate that the APA process might take longer than one between more experienced countries. Also, the efficacy of the core negotiating relationships between the affected countries sometimes produces periods of greater and lesser effectiveness.9

Type of Issues

The type of transfer pricing issue can affect the decision whether to pursue an APA and whether the APA is best dealt with bilaterally or unilaterally. Some issues, like royalty determinations, may be inherently difficult to resolve without a bilateral negotiation; in the long run, a bilateral APA may be the most effective way to eliminate the exposure to a transfer pricing examination in either country. In other circumstances, the issues and likely outcome of an APA for U.S. distribution may be relatively straightforward, but the time and cost of negotiating a bilateral APA may still be cost effective because of a desire for additional certainty.

Examination History

“Examination fatigue” is a common driver for the decision to pursue an APA. The company may have experienced multiple examination cycles without the development of any controlling principle to guide its transfer pricing determinations. The taxpayer may be looking for a fresh perspective from the government and an approved approach regarding the transfer pricing issue. Although the examination team will be involved in an APA, jurisdiction for the issue rests with APMA.10

Benefits Sought

The next set of factors that will influence the decision whether to pursue an APA will be the benefits sought by the company through the APA process and the likelihood of achieving those benefits. The following list in not intended to be exclusive but is intended to address the most common benefits sought through the APA process.

Freedom From Substantial Understatement Penalty

After the taxpayer and the IRS negotiate an APA, the taxpayer is only required to create documentation sufficient to demonstrate compliance with the APA.11 Thus, an APA eliminates the need to update annually the comparable company information used in preparing the taxpayer’s transfer pricing documentation.12 Taxpayers that have requested, but not yet executed, an APA, generally do not prepare documentation for the proposed APA period. According to Section 3.07 of the Rev. Proc. 2015-41, the submission of a complete APA request, updated and supplemented in accordance with APA procedures, “will be a factor taken into account in determining whether the taxpayer has met the documentation requirements of Treas. Reg. § 1.6662-6(d)(2)(iii) for the proposed APA years.” Taxpayers that were previously covered by an APA can rely for penalty purposes on the agreed APA methodology for a few years afterward.13

Freedom From Double Tax

Taxpayers generally experience inconsistent interpretation and enforcement of transfer pricing rules from country to country, with the attendant risk of double taxation. This exposure can be prospectively eliminated by negotiating a bilateral APA. Given the current transfer pricing landscape, the benefit of avoiding double tax exposure through negotiation of a bilateral APA may become more valuable in the post-BEPS global enforcement environment.

To be sure, following the BEPS project, the benefit of a unilateral APA may be diminished. Action 5 of the OECD BEPS Action Plan focuses on addressing harmful tax practices more effectively, taking into account transparency and substance.unilateral APA may be diminished. Action 5 of the OECD BEPS Action Plan focuses on addressing harmful tax practices more effectively, taking into account transparency and substance.14 To increase transparency, the BEPS project recommends a compulsory spontaneous exchange of unilateral advance pricing agreements with “affected countries.”15

After the taxpayer and the IRS negotiate an APA, the taxpayer is only required to create documentation sufficient to demonstrate compliance with the APA.

No Uncertain Tax Position

For tax years beginning after January 1, 2010, corporations are required to report uncertain tax positions, including transfer pricing determinations, on Schedule UTP if those positions would affect U.S. federal income tax liabilities.16 Taxpayers have a similar financial reporting requirement under ASC 740-10 (formerly known as FASB Interpretation No. 48). Taxpayers have been able to achieve certainty after the resolution of an APA, and some level of certainty after filing an APA request, thereby obviating UTP reporting.

Time and Cost Savings vs. Examination and Dispute Resolution

Transfer pricing examinations can be time-consuming and expensive. Transfer pricing disputes involve complex factual and economic issues requiring subjective judgment. The tax authorities often request information that requires the taxpayer to expend significant time and money, providing great quantities of information, only some of which may ultimately be relevant to the transfer pricing issues.

The APA process is intended to be more focused and take less time than a transfer pricing examination and dispute resolution efforts. It is difficult to evaluate the relative time and effort involved in negotiating an APA, but the average “months to complete” an APA has only dropped approximately ten percent from 2010 to 2014, despite substantial staffing additions.17 Rev. Proc. 2015-41 requires taxpayers to front-load information into the APA request that could be expected to be requested during the APA process. Therefore, the ultimate effort expended by taxpayers is likely to be the same, and the front-loading of the information is expected to expedite the APA process itself.

Broader Application of Benchmark APAs

Since the early days of the APA program, a small group of very large multinational companies have found it useful to negotiate a bilateral APA between two experienced treaty partners to set a benchmark for the appropriate transfer price for similar transactions with related parties in other countries.18 The company can share the bilateral APA and supporting information with any new examining country to demonstrate that the likely outcome of a principled negotiation would produce no adjustment. This benchmark approach has been desirable, because those very large companies had exposure with regard to similar transactions in multiple countries that actively pursue transfer pricing enforcement.19

In the aftermath of BEPS and the implementation of CbyC reporting, many more companies will likely find benchmark APAs to be a viable option. The anticipated increase in transfer pricing examinations and potential double tax following the adoption of CbyC reporting is expected to subject many new companies to transfer pricing scrutiny in multiple jurisdictions. In this environment, a benchmark APA to address similar transactions may be desirable for many more companies.

Taxpayers generally experience inconsistent interpretation and enforcement of transfer pricing rules from country to country, with the attendant risk of double taxation. This exposure can be prospectively eliminated by negotiating a bilateral APA.

Moving Forward on APAs

Recent changes in the global transfer pricing enforcement environment have made APAs generally more desirable. However, the decision by a company to pursue an APA should still entail a review of the taxpayer-specific factors that make an APA more or less appropriate and the benefits sought by the company through the APA process.

Steven C. Wrappe is KPMG’s national leader of Global Transfer Pricing Dispute Resolution (TPDR) and deputy head of Global TPDR, based in Washington, D.C.

Editor’s Note: This article represents the views of the author only and does not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. KPMG LLP, the audit, tax, and advisory firm (, is the U.S. member firm of KPMG International Cooperative. KPMG International’s member firms have 174,000 professionals, including more than 9,000 partners, in 155 countries.


  1. Alex Parker, McComber: 2015 U.S. APA Requests Already Tops 2014 Total, 24 Tax Mgt. Transfer Pricing Report 669 (Oct. 1, 2015).
  4. Announcement 2013-17, IRB 2013-16, 911 (Rev. April 15, 2013).
  5. Alex Parker, McComber: 2015 U.S. APA Requests Already Top 2014 Total, 24 Transfer Pricing Rpt. 669 (9/25/2015).
  6. Rev. Proc. 2015-41, I.R.B. 2015-35, Sec. 2.02(4)(a) and 2.03(3).
  7. Id. at 3.02 and Appendix.
  8. Announcement 2014-16, I.R.B. 2014-16 Table 4(a).
  9. Kevin Bell, “IRS Official: Challenges in U.S. Relationship With China Include View of Location Savings,” 23 Tax Mgt. Transfer Pricing Rpt. 1339 (March 5, 2015).
  10. Rev. Proc. 2015-41, I.R.B. 2015-35, Sec. 2.02(4)(a) and 2.03(3).
  11. Rev. Proc 2006-9,2006-1 C.B. 278, § 11.03.
  12. Treas. Reg. §§ 1.6662-6(b)(3); 1.6662-6(c)(6).
  13. Treas. Reg. § 1.6662-6(d)(2)(ii).
  14. OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5-Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris.
  15. Id.
  16. 2011: Instructions for Schedule UTP (Form 1120), Cat. No. 55028G.
  17. 42.5 months to 38.3 months. Announcement 2014-16, I.R.B., 2014-16, Table 7.
  18. Tax Officials From Four Countries Tackle Challenges to MAP Process, 20 Tax Mgt. Transfer Pricing Rpt. 686 (Jan., 12, 2012) (Proctor & Gamble Co. executive explained the negotiation of similar advance pricing agreements in multiple jurisdictions).
  19. S. Wrappe and K. Fujimori, The Best Transfer Pricing Defense is a Good Offense: Using a Bilateral U.S. APA to Benchmark Reasonable Results, 23 Transfer Pricing Rpt. 629 (Sept. 4, 2014).

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