United States - IRS’s annual report shows decline in number of executed APAs

The IRS on March 30 released Announcement 2023-10, the annual report on the advance pricing agreement (APA) program for calendar year 2022, which shows that significantly fewer APAs were executed and that it took longer to complete them, compared with 2021.

According to the report, 77 APAs were executed in 2022 (10 unilateral, 66 bilateral, and 1 multilateral) compared with the 124 that were completed in 2021. The term “executed APAs” in the report includes both initial and renewal APAs; since 42 of the 2022 executed APAs were renewals, that means that only 35 of the APAs completed in 2022 were new agreements. 

The number of APA applications filed rose in 2022, with a total of 183 applications (22 unilateral, 154 bilateral, and 7 multilateral), compared to 145 filed in 2023.

The combination of these two trends – an increase in the number of applications filed and a decrease in the number of executed APAs – resulted in an increase in the number of pending APAs, which as of December 31, 2022, stood at 564 (54 unilateral, 480 bilateral, and 30 multilateral). 

These metrics are summarised in the table below:

The median completion time for an APA – including both unilateral and bilateral APAs -- also rose in 2022, from 35.1 months in 2021 to 43.4 months in 2022. More specifically, the median time for a new APA rose to 53 months, compared to 49.2 months in 2021, but the median time for a renewal APA went down to 30.6 months in 2022 from 35.1 in 2021.

Of the bilateral APAs executed in 2022, 39% involved Japan, followed by Canada with 14% and India and Switzerland tied for third place with 8% each. Not surprisingly, the highest number of pending APAs – 24% -- also involve Japan. 

APA term length

Rev. Proc. 2015-41, which sets out the procedures for applying for an APA, provides that taxpayers should request an APA term that will cover at least five prospective years. Taxpayers may also request that the APA be “rolled back” to cover one or more earlier taxable years, although the appropriate APA term is decided on a case-by-case basis. 

Not surprisingly, then, a five-year term was the most common term length of those APAs executed in 2022: 37 agreements included five-year terms, 12 had a six-year term, and nine had a seven-year term. The average term length was six years.

A substantial number of those APAs with terms of greater than five years were submitted as a request for a five-year term, and the additional years were agreed to between the taxpayer and the IRS (or, in the case of a bilateral APA, between the IRS and the foreign government upon the taxpayer’s request) to ensure a reasonable amount of prospectivity in the APA term.

Of the APAs executed in 2022, 16% included rollback years. 

Executed APAs

Almost one-third of all bilateral APA applications filed in 2022 involved Japan (29%). India was second, with less than half that number, at 14%. Japan was also first in the number of bilateral APAs executed, accounting for 39% of the total, while India accounted for 9%.

In terms of the relationship between controlled parties, a majority of APAs – 62% -- involved a non-U.S. parent and a U.S. subsidiary, and 31% involved a U.S. parent and a non-U.S. subsidiary. The remaining 7% involved sister companies.

No single type of covered transaction dominated in APAs executed in 2022: 37% involved tangible property, 39% involved services and 22% involved intangible property. 

A substantial majority of covered transactions were evaluated using the comparable profits method/transactional net margin method --77% for tangible and intangible property transactions and 80% for services transactions.

Laurie Dicker
BDO in United States

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