We have gathered feedback from the tax authorities of various key countries to find out the specifics about their APA programs. Read the following Q&A interview on the topic of APAs in United States with Richard McAlonan, APMA Director at the IRS.
Q: What are, in your view, the main achievements of your APA program?
A: The main achievement of the APA program has been to make the APA process part of how companies think about transfer pricing. As one of the first tax authorities to establish an APA program, we have been able to encourage compliance through the APA process and have it be an effective tool for taxpayers to deal with transfer pricing issues.
Recently, the APA program has seen enhanced efficiencies created through staffing additions and the merger of the former APA and competent authority offices to form the Advance Pricing and Mutual Agreement Program (“APMA”); this merger has enabled us to eliminate some procedural hurdles and helped to re-focus the program in terms of its original objective.
Issues and challenges
Q: What are the main challenges facing your APA program?
A: A main challenge is to keep focused on our primary objective of moving cases forward and resolving them on a principled basis, and in an efficient and timely manner. The objective is to obtain fair and reasonable outcomes and avoid the APA process feeling like an audit.
Q: Are there particular substantive issues (for instance, marketing intangibles or buy-ins for cost-sharing arrangements, etc.) that have been more difficult to deal with?
A: Buy-ins for cost sharing arrangements can be the most difficult substantive issue due to the political and emotional issues surrounding the movement of intangibles offshore.
Q: Are there particular procedural issues (for instance, APAs involving more than two jurisdictions or APAs where prior years are under the mutual agreement procedure and these involve large proposed adjustments, etc.) that have been more difficult to deal with?
A: We are seeing more interest in multilateral APAs and not just in the financial services industry or the global dealing context. Dealing with multiple jurisdictions are a procedural challenge for the tax authorities to coordinate, and taxpayers need to assist with the facilitation of the process in these multilateral cases. We have been approached about doing APAs with two or three other countries, all high tax jurisdictions, where the process would be open and transparent between the taxpayers and the tax authorities. This is the direction we would like to aim towards with the same information being provided by the taxpayer, at the same time, to all the relevant tax authorities, similar to what happens in a joint audit.
Another procedural issue is that it is difficult to resolve cases with governments that we do not meet with on a regular basis. Also, staffing constraints in some of our treaty partners can result in long delays in resolving cases.
Q: Are there any other issues that you would like to bring to the attention of taxpayers as potentially difficult?
Q: From your experience, what are the main best practices that you would recommend that taxpayers adopt in requesting and filing for an APA?
A: Provide APMA with a complete submission, one that is robust, well-written, and has a detailed economic analysis. Also, respond to questions in a timely manner and provide the same information to both governments concurrently. It is critical that the governments be treated equally in terms of taxpayers providing them with the same information. Also, it does not help the process if one government receives written information well in advance of a negotiation and the other gets it a few days before.
Lastly, taxpayers should be flexible on the outcome they can accept from the APA process. Ultimately, the APA process ends with a discussion and decision between the two or more governments (or a decision by the IRS, in the case of a unilateral APA) and taxpayers need to have flexibility in the result and have a range of acceptable outcomes.
Trends and outlook
Q: Based on your experience, have you noticed certain trends in any of the following topics:
- Type of APA requested (unilateral vs. bilateral)
A: The percentage of unilateral versus bilateral APAs has remained generally consistent with more than 75 percent of taxpayer requesting bilateral APAs.
- Type of transaction covered
A: For 2012, the breakdown of transactions covered in completed APAs included sales of tangible property 42 percent, services 37 percent, intangible property 18 precent, and other 3 percent.
APMA prefers that all material intercompany transactions between the parties be covered under the APA or at least be made visible in order that the ”big picture” be understood.
- Transfer Pricing Methodology (TPM) proposed
A: The CPM/TNMM is the TPM used in 75 percent of the APAs closed in 2012.
- Reason of APA filing (difficult transfer pricing audits/examinations; desire for certainty; other)
A: A big reason is the desire for certainty. This can become an even more important reason for seeking an APA as APAs are processed more efficiently. Avoiding a difficult audit experience can also contribute to the desirability of an APA.
- Are there particular industries seeking APAs?
A: For 2012, the majority of APAs finalized by industry were manufacturing or wholesale/retail trade, with manufacturing comprising computer and electronic products chemicals, transportation equipments, and electrical equipment.
Q: Looking to the future, what do you foresee for APAs?
- Do you see an increase vs. stability in terms of demand for APAs?
A: We see an increase in demand as long as we can deliver in a timely fashion. Also, as the Transfer Pricing Practice [the IRS enforcement group responsible for strategically and systematically administering transfer pricing issues] becomes more effective, we believe that more audit activity will translate into more demand for APAs.
- APA staffing needs for tax authority
A: Currently, we don’t have any staffing needs as we have had an influx of hiring in the past couple of years. However, as talented people depart the program, keeping staffing at the current level may be difficult due to budgetary pressures.
- Mechanism to deal with triangular issues
A: We have no policy regarding triangular issues and accept them on a case-by-case basis. Joint meetings can help in dealing with these issues.
A: Arbitration has been a very effective tool, in particular how it was designed with baseball style arbitration. It has improved processing time as everyone knows that the clock is ticking.
A: While most of our APAs are with countries with established APA programs, such as Japan, Canada, and the United Kingdom, we have also seen bilateral APA filings with other countries with newer programs.