New IRS report provides details on 2016 advance pricing agreements
New IRS report provides details on 2016 advance pricing agreements
In an Announcement, IRS has released its eighthteenth required report providing details on the experience, structure, and activities of the Advance Pricing and Mutual Agreement (APMA) Program; the report covers calendar year 2016. The total number of advance pricing agreements (APAs) executed decreased from 110 in 2015 to 86 in 2016. The percentage of new APAs executed (i.e., not renewals of prior APAs) slightly increased from 40% in 2015 to 41% in 2016.
Background. An APA generally combines a voluntary agreement between a taxpayer and IRS on an appropriate transfer pricing methodology (TPM) for covered transactions, with an agreement between the U.S. and one or more foreign tax authorities that the TPM is correct. This kind of bilateral APA assures the taxpayer that the income from the transactions will not be subject to double taxation by the U.S. and the foreign tax authority.
IRS and taxpayers also may execute unilateral APAs, which are agreements establishing an approved TPM for U.S. tax purposes. A unilateral APA binds the taxpayer and IRS but does not prevent foreign tax bodies from taking different positions. If a transaction covered by a unilateral APA is subject to double taxation as the result of an adjustment by a foreign tax administration, the taxpayer may seek relief by requesting that the U.S. Competent Authority (USCA) consider initiating a mutual agreement proceeding, provided there is an applicable income tax treaty in force with the other country.
The APA process is voluntary. Taxpayers submit an application for an APA, together with a user fee. In August of 2015, IRS issued new Revenue Procedures governing the Mutual Agreement Program (MAP) and APA applications. Rev Proc 2015-41, 2015-35 IRB 236 (Weekly Alert ¶ 21 08/20/2015), provides guidance and instructions on filing APA requests as well as guidance and information on the administration of APAs. Rev Proc 2015-40, 2015-35 IRB 263 (Weekly Alert ¶ 20 08/20/2015), provides procedures and guidance on requesting assistance from the USCA where the taxpayer believes that the actions of the U.S. or a treaty country result or will result in the taxpayer being subject to taxation not in accordance with the applicable U.S. tax treaty.
In February of 2012, the former APA Program was moved from the Office of Chief Counsel to the Office of Transfer Pricing Operations, Large Business and International Division (TPO) and combined with the USCA staff responsible for transfer pricing cases, thereby forming the current APMA Program.
New report. Of the 86 agreements executed in 2016, 21 were unilateral, 65 were bilateral, and none were multilateral. In comparison, of the 110 agreements executed APAs in 2015, 30 were unilateral, 80 were bilateral, and none were multilateral.
In 2016, there were 98 APA applications filed (14 unilateral; 84 bilateral; and none multilateral), as compared with the 183 APA applications filed in 2015 (52 unilateral; 127 bilateral; and 4 multilateral). As of Dec. 31, 2016, APMA had also received 17 user fee filings that were not yet accompanied by substantially complete APA applications, in addition to the 98 complete APA applications.
Ann. 2017-3 noted that nearly three quarters of the total number of bilateral APAs executed in 2016 involved the U.S. entering into mutual agreements with either Japan or Canada.
Ann. 2017-3 noted also noted that the number of pending APAs dropped slightly from 2015 to 2016, with Japan and Canada continuing to account for almost half of all pending bilateral APAs.
The APA report also provides insight into the industries that are finalizing or renewing APAs. Manufacturing comprised 40%, followed by wholesale/retail trade with 33%. Within the manufacturing APAs, 7% reflected computer and electronic products, while chemical and transportation equipment each reflected 6%, and miscellaneous manufacturing reflected 9%; all other types of manufacturing comprised 12%. Within the wholesale/retail trade APAs, 21% reflected merchant wholesalers dealing in durable goods and 9% dealing in nondurable goods; all other types of other wholesale/retail trade comprised 3%.
As in prior years, more than half of the APAs executed in 2016 involved transactions between non-U.S. parents and U.S. subsidiaries. In 2016, approximately 65% of the APAs executed involved transactions between a non-U.S. parent and a U.S. subsidiary; 20% involved transactions between a U.S. parent and a non-U.S. subsidiary; and 15% involved sister companies. By way of comparison, in 2015, approximately 64% of the APAs executed involved transactions between a non-U.S. parent and a U.S. subsidiary; 18% involved transactions between a U.S. parent and a non-U.S. subsidiary; 11% involved sister companies, and the remaining 7% involved all other relationships.
While the majority of transactions covered in APAs executed in 2016 involve the sale of tangible goods and the provision of services, Ann. 2017-3 noted that IRS also has successfully completed numerous APAs (20% of the covered transactions) involving the use of intangible property. In 2016, 27% of covered transactions involved the sale of tangible property into the U.S.; 20% involved the performance of services by a U.S. entity; 17% involved the sale of tangible property from the U.S.; 14% involved the use of intangible property by a U.S. entity; 14% involved the performance of services by a non-U.S. entity; and 6% involved the use of intangible property by a non-U.S. entity. By way of contrast, in 2015, 26% of covered transactions involved the sale of tangible property into the U.S.; 24% involved the performance of services by a U.S. entity; 16% involved the use of intangible property by a U.S. entity; 14% involved the performance of services by a non-U.S. entity; 11% involved the sale of tangible property from the U.S.; and 8% involved the use of intangible property by a non-U.S. entity.
Consistent with prior years, the primary transfer pricing method used for transfers of both tangible and intangible property in APAs executed in 2016 was the Comparable Profits Method/Transactional Net Margin Method (CPM/TNMM). The CPM/TNMM was used for 89% of transfers of tangible and intangible property while all other methods combined accounted for the other 11% of such transactions.
For the APAs executed in 2016 that used external comparable data in the analysis, the most widely used data source for comparables was Standard and Poor’s Compustat/Capital IQ database. Other sources were also used in appropriate cases (e.g., where the tested party was not the U.S. entity or transaction-based methods were applied).
References: For advance pricing agreements, see FTC 2d/FIN ¶ G-4743; United States Tax Reporter ¶ 4824.07.
Ann. 2017-3, 2017-15 IRB
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