Taxpayers need to consider how to respond to advance pricing agreement (APA) challenges that flow from the coronavirus (COVID-19) pandemic.
An APA is essentially a long-term contract between a tax authority and a taxpayer, the key feature of which is agreement that the tax authority will not disturb the taxpayer’s transfer prices as long as the taxpayer follows an agreed method for setting those prices. Since the advent of the OECD’s base erosion and profit-shifting (BEPS) project, many taxpayers have turned to APAs to manage the uncertainty of the evolving international tax landscape.
In 2018 and 2019 combined, the IRS Advance Pricing and Mutual Agreement (APMA) program received 324 APA requests and completed 227 APAs. The U.S. program is more popular than ever, a phenomenon that extends to APA programs in many countries around the world.
The length of an APA contract can vary. In the United States, the average length of APA contracts concluded in 2018 and 2019 was 6.4 years, but APAs covering periods of seven, eight, or 10 years are common.
For many APAs in effect or under negotiation, a tension exists between achieving long-term transfer pricing certainty and the need to accommodate unexpected economic disruptions such as the conditions many companies are now facing from the impact of COVID-19.
A long APA term can help taxpayers manage transfer pricing risk but can pose a problem if attached to an APA that has static pricing targets without a mechanism to adjust those targets in the event of a change to taxpayer-specific or macroeconomic conditions.
Read a May 2020 report* [PDF 890 KB] prepared by KPMG LLP
*This report originally appeared in Tax Notes Federal (25 May 2020) and is provided with permission of the publisher.
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