On March 22, 2022, the Internal Revenue Service's Advance Pricing and Mutual Agreement Program ("APMA") released its 2021 Announcement and Report Concerning Advance Pricing Agreements ("2021 Annual Report"). The 2021 Annual Report shows that multinationals' demand for advance pricing agreements ("APAs") is high and increasing, with APMA receiving 145 APA applications in 2021, a 20% increase from 2020. The report similarly shows that APMA made steady progress in concluding APAs during 2021 with 124 completions, with notable highlights including a substantial increase in completions of bilateral APAs with Germany and a decrease in completions of bilateral APAs with India.
According to APMA's APA Annual Reports, the 145 APA applications received in 2021 were the third highest (behind only 2018 with 203 and 2015 with 183 applications) received any year in the over 30-year history of APMA and its predecessor organization, the APA Program. Indeed, 2021 was perhaps a record year for real APA demand, considering that the higher numbers of APAs requested in 2018 and 2015 were likely attributable to accelerated filings by multinationals in advance of user fee increases and the effective date of a new revenue procedure (Rev. Proc. 2015-41) that took effect during those years. Multinationals' current high demand for APAs is likely attributable to several factors, including increased global audit activity and disputes, the changing international tax environment, and the uncertainties that some multinationals faced as a result of COVID-19 and related supply chain disruptions.
Of the 145 APA applications that APMA received in 2022, 16 were unilateral, 121 were bilateral and 8 were multilateral. Japan remained the top counterpart country for bilateral APA requests filed in 2021, though its lead shrunk. India and Canada took their customary spots as runner-ups, comprising 16% and 10% of total filings respectively, followed by Italy (7%), Germany (5%), Korea (4%), the United Kingdom (3%), Mexico (3%), and China (3%). Bilateral APA requests involving "all other countries," which includes all countries for which the number of APA requests filed fell below 3% of the total, constituted the remaining 16% of applications filed. While most of these figures are not noteworthy, 2021 is the first year since 2015 that enough applications for bilateral APAs with China were filed to be separately reported.
In 2021, APMA executed 124 APAs, including 25 unilateral APAs, 98 bilateral APAs and 1 multilateral APA. Notably, Germany accounted for 20% of executed bilateral APAs in 2021, the second-most among any counterpart country. (Japan, as usual, was the top counterparty country in executed bilateral APAs.) This is significant since in recent years, bilateral APA applications with Germany never represent more than 10% of APMA's inventory. And executed APAs with Germany (to the extent there were enough to warrant separate disclosure at all) never represented more than 5% of APMA's total for any recent year. On the other hand, significantly fewer bilateral APAs with India were completed in 2021 than in 2020, both in absolute terms and as a percentage of APMA's total. Specifically, India was the counterpart country to only 6% of the bilateral APAs executed by APMA in 2021 (down from 11% in 2020) despite its consistently high number of applications that contribute to 22% of APMAs pending bilateral inventory.
APMA's median time required to complete an APA increased moderately to 35.1 months in 2021 from 32.7 months in 2020—new APAs required a median time of 45.2 months (up from 43.7) and renewals required 30.9 (up from 29.6). These statistics go hand-in-hand with the slightly fewer executed APAs in 2021 (124, down from 127 in 2020). The median time required to complete a unilateral APA rose to 26.1 months in 2021 from 24 in 2020—23.5 months for a new unilateral APA (a drastic drop from 35.3 in 2020) and 26.1 months for a renewal unilateral APA (up from 21 in 2020). The median time required to execute a bilateral APA rose to 36.6 months in 2021 from 36.3 months in 2020—49.2 months for a new bilateral APA (up from 43.7 in 2020) and 35.1 months for a renewal bilateral APA (up from 30.3 months in 2020).
APMA's slight increase in APA completion times and slight decrease in APA completions are not surprising given the influx of a near-record number of APA applications. Further, another significant factor that may have impacted 2021 APA completion times and numbers are mutual agreement procedure ("MAP") cases, which APMA personnel (as well as their treaty country counterparts) are also responsible for negotiating. While APMA statistics for MAP cases filed and completed in 2021 are not expected to be publicly available until published by the OECD later this year, published statistics for 2020 indicate that APMA had 478 transfer pricing MAP cases in its inventory as of December 31, 2020, a substantial increase from APMA's start inventory as of January 1, 2020 of 429 transfer pricing cases. In addition, while it is possible that APMA's 2021 APA completion times and numbers may have been affected by COVID-19 and the inability of APMA to hold in-person competent authority meetings with its treaty partners, APMA's 2020 Annual Report, which was the subject of a prior blog post, suggests that COVID-19 had little impact on APMA's productivity that year.
It is also worth noting that the 2021 Annual Report indicates that APMA had added significant new personnel resources in 2021. Specifically, in 2021, APMA's headcount grew to 80 team leaders and 25 economists (from 64 and 21, respectively, in 2020). The number of managers (9) and assistant directors (3) remained constant. In addition, APMA has advertised additional open positions in 2022, indicating that it has authority to further expand its resources. These new resources will likely be critical for APMA to timely process, negotiate and conclude both APA and MAP cases as multinationals continue to face increased uncertainty and potential for disputes in jurisdictions around the world.
Finally, we note that while APAs remain the primary voluntary process utilized by multinationals seeking to mitigate their transfer pricing risk, the International Compliance Assurance Program ("ICAP") now provides another alternative that we expect multinationals to utilize more frequently. (We examined ICAP in detail in a prior blog post). ICAP differs from the APA process insofar as it generally only provides multilateral comfort and assurance as opposed to binding certainty, but it has other advantages including the ability to include more tax administrations and conclude the process in less time. ICAP commenced as a pilot program in 2018, but was made permanent in 2021 and now includes two annual rounds for which submissions are due March 31 and September 30, respectively (submissions for the next round are due September 30, 2022). Going forward we would expect greater participation in ICAP by US and non-US based multinationals. While ICAP's net impact on the APA process is yet to be seen, it is possible that the process may reduce the need for APAs in lower-risk cases, possibly leading to fewer APA applications and shorter completion times (to the extent ICAP review of lower-risk cases helps free up APMA resources) over time.
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