The Advance Pricing Agreement (APA) program is an essential aspect of the Internal Revenue Service (IRS) tax regime, which is designed to help taxpayers establish appropriate transfer pricing methodologies for their cross-border transactions. The APA program provides an opportunity for multinational businesses to receive certainty in their transfer pricing arrangements through a pre-approved agreement with the IRS. Through an APA, the taxpayer and the IRS agree on a transfer pricing methodology in advance of the tax year, providing a secure and predictable way to plan for future transactions.
The IRS has been offering the APA program since 1991, and it has been gaining in popularity in recent years due to its success in reducing transfer pricing disputes and providing taxpayers with tax certainty. In 2020, the IRS published updated guidance on the APA program, outlining several key features of the program and how it can benefit taxpayers.
One of the most significant changes to the APA program in 2020 is the expansion of the program to include small businesses. The IRS has recognized that small businesses also face transfer pricing challenges, and the APA program can provide these businesses with the same tax certainty as larger multinationals. The threshold for small businesses to participate in the APA program was also raised from $10 million to $50 million, making the program more accessible to a broader range of taxpayers.
Another key feature of the 2020 APA program is the emphasis on the use of contemporaneous documentation to support transfer pricing methodologies. The IRS is encouraging taxpayers to maintain extensive documentation to support their transfer pricing arrangements, which may include country-by-country reporting, functional analysis, and benchmarking studies. The use of contemporaneous documentation can significantly reduce the risk of a transfer pricing dispute and can provide a more streamlined process for obtaining a pre-approved APA.
The 2020 APA program also includes updated guidance on the APA request process, which includes several new features to streamline the process for both taxpayers and the IRS. These features include the extension of the APA term from five to ten years for bilateral APAs, the introduction of a new expedited review process for certain types of APAs, and the option to use arbitration to resolve disputes that may arise during the APA term.
Overall, the 2020 APA program offers several new features designed to make the program more accessible and efficient for taxpayers. Through the use of a pre-approved APA, multinational businesses can obtain tax certainty and reduce the risk of a transfer pricing dispute, allowing them to focus on their core business activities. The IRS has recognized the importance of the APA program and continues to improve the program to meet the needs of taxpayers in an ever-changing global economy.