IRS Internal Guidance; a Focus on Advanced Pricing Agreements

On April 25, 2023, the IRS published an interim guidance memorandum for agents and other employees of their treaty and transfer pricing operations practice, specifically regarding requests for advanced pricing agreements, an effective tool typically used by larger multinational enterprises to help guarantee compliance for transfer pricing. The internal guidance increases the scrutiny in the initial review, which likely leads to more rejections quicker, and recommends prefiling memorandum when not required.

The Treaty and Transfer Pricing Operations practice area in the Large Business and International Division within the IRS has the responsibility of receiving Advanced Pricing Agreement (APA) submission requests, reviewing them, and approving them. APAs are tools used to gain compliance certainty with the IRS to ensure arm’s length principals are satisfied for transactions ahead of them occurring and ahead of any tax filing as a protective measure.

While APAs are broad in scope, potentially being applicable to all transactions between any related entities, they’re most used by businesses with an international organizational structure. Of 77 successfully executed APAs in 2022, over half were between foreign parents and US subsidiaries.

Currently, approval of APAs is resource intensive and slow. The current application use fee is $113,500, and the average time per accepted APA is over three years. The purpose of the internal guidance, therefore, is an attempt to maximize the efficient use of IRS resources and increase the timeliness of successful APAs.

The interim guidance outlines the system that evaluates if a received APA request is the most efficient transfer pricing mechanism given the circumstances. If not, the request will be rejected and referred to alternative methods. As such, we expect to see timelier and more rejections of APA requests. The guidance will have no change on the requirement of a prefiling memorandum but encourages where it’s not required to gain the benefit of a prefiling memorandum review. The prefiling memorandum may help ensure that the APA won’t be rejected due to the determination that another transfer pricing workstream is better suited given the business circumstances. Per a senior IRS official, transfer pricing “fits squarely within the goals” for funding from the Inflation Reduction Act.

As transfer pricing becomes an elevated topic of conversation with tax authorities, it is becoming increasingly important to have studies and documentation to protect against fees and additional scrutiny. If you have any questions regarding transfer pricing or any international tax-related manner, don’t hesitate to contact us.