Advance Pricing Agreements Thrive Despite the Pandemic

May 4, 2021, 7:01 AM

It has been a year since Covid-19 caused widespread changes to almost every aspect of life. Businesses have adapted by taking whatever measures they could, including having employees work from home when possible, reevaluating their supply chains, and restructuring their businesses in various ways. Governments have offered varying degrees of support to businesses as all adjusted to the pandemic.

As the vaccinated population grows and a return to normal becomes increasingly likely, multinational corporations (MNCs) will continue to grapple with a number of tax issues, including the continued impact of disruptions to their transfer pricing resulting from the pandemic.

MNCs have sought guidance from the Internal Revenue Service on how to treat pandemic-related changes to their transfer pricing, including information from the IRS Advance Pricing and Mutual Agreement (APMA) Program. Public announcements have been sparse. Tax professionals hoping that the release of the APMA Program’s Annual Statutory Report (report) on March 30 would provide additional guidance may be disappointed at the lack of explicit commentary on the treatment of Covid-related disruptions.

Despite the absence of commentary on pandemic-related issues, the report nonetheless conveys a significant message: the pandemic has not affected the APMA Program’s ability to fulfill its role as an alternative dispute resolution program for taxpayers seeking transfer pricing certainty. The program remains as robust as ever, and the statistics in the report show that APMA continues to serve as an attractive forum for resolving transfer pricing issues, even in a global pandemic.

This article summarizes APA activity over the past year, details how various Covid considerations may impact APA negotiations, and comments on the implications of potential U.S. tax changes and ongoing global developments for transfer pricing.


Covid has presented a significant challenge for many businesses, but the 2020 APA statistics in the report suggest the APMA program has been largely unaffected. One hundred twenty-one APA applications were filed in 2020, exactly the same number as in 2019, demonstrating the continuing popularity of the program. The 2020 filings consisted of 15 unilateral applications, 103 bilateral applications, and three multilateral applications. Japan once again led the way in bilateral applications, accounting for 41% of all such applications. India, Canada, and Germany followed with 11%, 10%, and 7% of bilateral applications, respectively.

In 2020, APMA executed 127 cases: 19 unilateral, 105 bilateral, and three multilateral. Those numbers were up slightly from the 120 cases executed in 2019. As the statistics show, the majority of cases closed in 2020, as in prior years, were bilateral, including 52% of executed bilateral cases with Japan. Most, if not all, bilateral APAs traditionally required travel for treaty partner negotiations. The higher number of closures suggests that pandemic-related travel restrictions have not affected APMA’s ability to negotiate and conclude those cases. Moreover, any pandemic-related work and travel restrictions do not appear to have affected completion times, which for the most part continued the improvement over prior years.

The median number of months required to complete new unilateral APAs in 2020 was 35.3, compared to 33.2 in 2019. For renewal unilateral APAs, the median completion time in 2020 was 21.0 months, compared to 28.7 months in 2019. For new bilateral APAs, the median completion time was 43.7 months in 2020 compared to 45.9 months in 2019. For renewal bilateral APAs, the median completion time in 2020 was 30.3 months, compared to 38.7 months in 2019. An increase in APMA personnel may have helped the program execute cases more quickly. In 2020, APMA had 64 team leaders, 21 economists, nine managers, and three assistant directors, a significant increase over the 52 team leaders, 16 economists, six managers, and three assistant directors in 2019.

The 2020 APMA statistics confirm that companies continue to use the program to limit risk and seek certainty, perhaps more so given today’s environment. That trend is expected to continue as countries look to close the revenue gap resulting from the pandemic, which is likely to lead to increased controversy. The statistics also show that the APMA program has adapted to meet difficulties that may have arisen from the pandemic, and it is well positioned to meet the challenges arising from the anticipated increase in controversy.


APAs provide substantial benefit to MNCs by limiting risk and providing certainty on intercompany pricing. As the statistics from the 2020 report show, the pandemic has not slowed the work done by the APMA program or diminished the value of an APA. In fact, in many ways, the pandemic has likely increased that value, since an APA by its nature provides a forum for resolving difficult and unique transfer pricing issues in a more constructive fashion than an audit.

In a May 11, 2020, announcement titled “Competent Authority Filing Modifications and APMA APA Consultations,” the IRS emphasized the problem-solving function in the midst of the pandemic by noting that “APMA is actively discussing various substantive and procedural issues with treaty partners, including such technical issues as the application of transfer pricing methods in periods of economic distress and the impacts of current economic conditions on specific industries, types of taxpayers, regions, etc.” As stated above, the report does not mention how the APMA program approached these issues in 2020. Taxpayers thus have no guidance on how to deal with them, other than on a case-by-case basis with APMA. The following paragraphs outline considerations relevant to the pandemic-related issues with respect to APAs.

Just because you coughed, it doesn’t mean you have Covid

Just as a cough or other cold symptoms do not necessarily mean a person has contracted Covid, a taxpayer’s inability to comply with its own transfer pricing policies does not mean the disruption was caused by the pandemic. The first step in analyzing pandemic-related transfer pricing disruptions is to determine whether the disruptions were in fact caused by the pandemic, as opposed to other factors that taxpayers might face in the normal course of business. The IRS will likely have a high bar for proof that the disruptions stem from the pandemic before discussing potential resolutions with the taxpayer.

Develop your own cure

The APMA program generally expects taxpayers to develop their own economic proposals based on strong factual foundations and to present those proposals upfront in their APA submissions. The process serves the interests of taxpayers, who know their facts better than the IRS does, and of the APMA program, which generally does not have the resources, and should not be expected, to develop the facts and economics for taxpayers. The same general expectation holds for proposals related to intercompany pricing affected by the pandemic. John Hughes, the APMA Director, stated publicly that before reviewing the potential impact of the pandemic on a taxpayer’s transactions, the APMA program needs to know exactly what happened to the taxpayer’s business, and “exactly what is the assistance that you’re seeking,” adding that taxpayers need to gather concrete data to help facilitate discussions between competent authorities.

Regardless of whether the APA is under preparation, in negotiation, or already executed, this process would mean gathering the facts necessary to show that any changes to intercompany pricing were caused by the pandemic, and proposing how those changes should be taken into account. Some of the more common pandemic-related transfer pricing issues we have seen include:

  • A significant decrease in sales in an industry known to be affected by the pandemic.
  • Additional costs incurred for pandemic-related expenses (layoffs, termination, lease breakage, etc.).
  • Operational impacts such as forced shutdowns due to an outbreak in a manufacturing facility.
  • Changes to the location of key decision-makers.
  • Changes to the anticipated location of the services provided by employees.
  • Current financial results of comparables used to benchmark tested party returns.
  • Treatment of government subsidies.
  • Application and interpretation of relevant terms in the intercompany agreements.
  • Whether a low-risk entity should continue to be treated as a no-risk entity.
  • The likely time frame for a rebound to normalcy.

The solutions proposed under any of those factors should take into account the underlying facts and, where applicable, the potential treatment by the treaty partner.

Consider the APA vaccine

Developing and negotiating an APA is in most cases not Operation Warp Speed. It can take several months to prepare the APA request, and, consistent with the statistics shown above, the time required to negotiate and finalize an APA can range from approximately one to four years, depending on the type of APA and the complexity of the facts and economics. Still, many MNCs, not just those affected by the pandemic, would benefit from an APA.

An APA provides certainty on the covered issues, which will prove immensely valuable in the coming years, when governments will be looking to increase tax revenues through transfer pricing adjustments. An APA also frees companies from various reporting and documentation requirements, including Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48) analyses and reserves on the covered issues, tax code Section 6662 documentation studies, and local files in the treaty country. Taxpayers with APAs also do not face transfer pricing adjustments, double tax, and substantial understatement penalties on the covered issues.

For taxpayers uncertain about whether an APA would be appropriate, the IRS offers prefiling conferences which allow taxpayers to present general facts and propose an economic framework to APMA personnel, including on an anonymous basis. APMA personnel provide valuable feedback on how the issues will be treated in the APMA Program; the length of time to negotiate the case; and the factual information and economic analyses that would assist APMA in developing the case. The prefiling conferences assist taxpayers in determining whether an APA is the most effective process for resolving their transfer pricing issues.


Taxpayers considering new or existing APAs face a host of tax considerations as the U.S. and other governments address the economic consequences of the pandemic. For example, the first major piece of legislation under President Biden has been the enactment of the $1.9 trillion American Rescue Plan Act of 2021. The second appears to be an infrastructure bill that could exceed $2 trillion and include potential corporate tax increases. Specific items included in President Biden’s campaign platform include an increase in the corporate tax rate to 28% and a phase out of the Section 199A deduction. President Biden has also announced support for additional IRS funding and a broader enforcement role for the agency to help pay for the infrastructure program, in particular with respect to cross-border transactions.

In the midst of domestic tax uncertainty and an IRS adequately funded to discharge its enforcement function, the ability to enter into an agreement that provides certainty on intercompany transactions in a cooperative and principled manner becomes increasingly beneficial.


In addition to potential tax developments in the U.S., MNCs must contend with various developments around the globe. Customs and tariffs continue to impact companies with cross-border transactions, and the rate and breadth of tariffs has grown drastically since 2018. The tariffs have had a dramatic impact on the transfer pricing results of MNCs, in particular those that rely on China manufacturing. The OECD’s two-pillar Tax Challenges of Digitalization project presents MNCs with additional uncertainty on the treatment of intercompany transactions. In addition, the U.S. is unlikely to be the only country that will increase tax agency funding and encourage aggressive enforcement of cross-border transactions. Most, if not all, countries will follow that path in an effort to increase tax revenues in the wake of the pandemic.


The global pandemic and its economic impact has greatly increased the uncertainty of transfer pricing outcomes and exposure to tax disputes. Fortunately, the U.S. APMA program has surmounted the many personnel, technical, and practical issues presented by the pandemic and continues favorable trends in its ability to initiate and conclude APAs.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Steven C. Wrappe is the National Technical Leader of Transfer Pricing in Grant Thornton’s Washington National Tax Office and an adjunct professor at New York University School of Law; Matthew Kramer is Transfer Pricing Managing Director for the West Region and is based in San Francisco; Matt Piper is a Transfer Pricing Senior Manager for the Central Region and is based in Minneapolis.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.

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