North American Revival of the Advance Pricing Agreement Program
Recent public statements from the Canada Revenue Agency (“CRA”) and the US Internal Revenue Service (“IRS”) confirm there have been significant improvements in the administration of the Advance Pricing Agreement (“APA”) Program. Richard McAlonan, director of the IRS’ Advance Pricing and Mutual Agreement Program (“APMA”) recently disclosed that the IRS completed 140 APAs in 2012, which is a historic record. In addition, Sue Murray, director of Canada’s International and Large Business Directorate’s Competent Authority Services Division, has also indicated that Canada will improve drastically on both the number of completions and the time for completions of APAs.
These improvements were not evident in the most recent APA Program reports, but both the CRA and IRS have stated the next reports will show significant improvements. For Canada, the most recent report was released January 10th for the CRA year ended March 31st, 2012. In this period only 10 completed cases were reported. The APA inventory increased from 96 to 102. The prior three years reported 17, 19, and 23 completed APAs. The average time for completion of an APA was 44 months. In 2011 the IRS was in the midst of staffing changes and reorganization. As a result, 43 APAs were completed compared to 69 in the prior year. For Canada, 71% of the APAs in process and 76% of the APAs completed are with the US.
What Has Caused these Improvements?
Increased Staffing: Both the CRA and the IRS have increased resources and staffing. In Canada, there are 55 employees including 35 economist and analysts in the Competent Authority Services Division. The US APMA group has added 60 staff recently, predominantly experienced transfer pricing professionals from the outside.
Organizational Changes: Both Sue Murray and Richard McAlonan have recently been appointed; Sue, in July 2012 and Richard, in April 2012. Since the 2010-2011 year, the CRA have asked APA applicants to increase their upfront investment in terms of their time and resources prior to being granted acceptance to the program. This requires detailed information pertaining to their financial statements, business operations, and industry. As a result, the pre-acceptance process is taking longer with 35 cases still pending acceptance in the APA program per the 2011-2012 program report. The IRS has undergone, and continues to undergo organizational change and have demonstrated early results. The most relevant for APA administration is the new APMA Program. The APMA is the result of moving the APA program from the office of the IRS Chief Counsel to an office under the Transfer Pricing Director of the Large Business and International Division and combining it with competent authority assistance, or the Mutual Agreement Procedure Program. This combines the collaborative approach of the APA program with the experience of the competent authority office on issues that have been, typically, contentious and adversarial. The combined group now has a structure similar to other tax administrations programs, including Canada.
What Does This Mean?
When reviewing the costs versus benefits of getting an APA for your organization, the timeframe for completion is likely shorter which would, presumably, result in lower costs and reduced disruption to business operations. If your company has complex transactions of a recurring nature, and results from tax authority audits are uncertain, it would be prudent to reconsider an APA. Transactions involving intangibles should especially be considered. The treatment of intangibles has been identified as a high priority by the IRS. This, together with the CRA’s aggressive positions on the use of intangibles, means more contentions audits related to intangibles are anticipated.