As mentioned in my prior blog post, the combination of the Advanced Pricing Agreement (APA) and Competent Authority (CA) programs to form the Advance Pricing Agreement–Competent Authority (APMA) office has produced a lively dialogue with our clients concerning both programs.  The questions that we hear from clients with respect to APMA include the following:

What is the future of APAs?

Transfer pricing (TP) is the critical international taxation issue, with nearly 70 countries currently requiring TP documentation.  In addition, all such countries have active enforcement programs.  With the evolution of uncertain tax  position requirements for financial accounting and tax return disclosure (UTP Schedule) in the U.S., the importance of TP continues to escalate.  Whether a country has a global or territorial tax system, TP remains critical for tax base defense.  APAs provide an important means of addressing these issues in advance.  All reporting countries continue to report growth in their procedures, creating internal resource allocation problems in poor economic/budgetary times for most countries.

What are the greatest advantages of using an APA?

The advantages include achievement of prospective certainty, flexibility, rollbacks and renewal.   Over the years, a critical advantage has been a means of achieving efficient resolution of proposed adjustments from tax authorities (U.S. or foreign).  In this regard, the CA process is also critical, which is the means of achieving bilateral resolution.  In recent years, we have found that the APA process is also an important means of addressing uncertain tax position issues when financial auditors take the position that—in their judgment—a provision must be made, though experience would indicate that the MNE’s posture is appropriate.

Finally, perhaps the greatest advantage is cost.  In our experience, an APA is typically about 25 percent of the cost of: (i) preparing TP documentation in the pertinent countries for a 5-year APA period; (ii) addressing FIN 48 issues; (iii) awaiting and handling examinations; (iv) handling proposed adjustments via appeals; and (v) achieving overall resolution via CA processes or litigation.  This is only the outside professional costs, not even considering internal time and expense.

What are the greatest disadvantages of using an APA?

The greatest disadvantages are time and cost, although as discussed above, the cost is typically materially less than doing documentation, awaiting and handling examinations, domestic dispute resolutions processes, and if available, CA resolution.

What poses the greatest threat to the future of APA programs?

Bureaucracy and desire for technical precision.  In our experience, the most efficient APA programs tend to be practical and patient.  In most countries, there is an almost inevitable effort to find the technically perfect solution, which takes time and resources.  TP is more about common sense and relative function/risk analysis than it is technical, which is a point often lost in bureaucratic insistence that the technical requirements of regulations or guidelines be precisely achieved.  The appropriate range for a large portion of APA issues is well known by all participants, yet each one normally has to be documented, analyzed and discussed.

Significant efficiency could be achieved by adopting practical safe harbors, at least in bilateral APAs, as the IRS has tried to do with routine services transactions.  If there is anxiety about such safe harbors, they could be limited to a 2-3 year period, subject to annual report review, which we have experienced in some countries.

We hope that these comments reflect directions in which the combined IRS APA-CA process will be headed.