APA Filings
Not surprisingly, the number of new APA filings decreased significantly from 203 in 2018 to 121 in 2019. This likely was due to companies strategically filing for APAs in 2018 before the APA user fee hikes effective on July 1, 2018, and January 1, 2019. That said, the number of APA filings in 2019 was largely consistent with the number of annual filings since 2011 (the major anomaly other than 2018 was 2015 when companies filed APA requests before compliance requirements under Rev. Proc. 2015-41 came into effect). Additionally, the number of multilateral APAs filed in 2019 increased again compared to 2018 (eight vs. seven, respectively), which combined is more than double the number filed from 2000 through 2017 (eleven). There are potential efficiencies created by resolving transfer pricing issues in several countries simultaneously, including from the taxpayer’s perspective, the possibility of avoiding audits of APA transactions (depending on local country rules).
APA Processing
The overall APA inventory in 2019 notched down slightly compared to 2018 (454 and 458, respectively), despite the government shutdown that covered most of January 2019. The number of bilateral APAs pending was nearly the same as in 2018 (387 and 386), while the unilateral APAs pending decreased (from 58 to 46). Japan (28%), India (21%), Canada (10%), Germany (8%), and Korea (5%) constituted the majority of the pending bilateral APAs, which was largely consistent with 2018. The report also included the number of pending bilateral APAs involving Mexico (5%), the UK (4%), Italy (4%), and all other countries (15%). There were 22 multilateral APAs pending in 2019 compared to 13 in 2018, which is a significant increase.
For APAs executed in 2019, renewal APA processing times showed improvement, but new APAs took about the same time as in 2018. Bilateral APAs executed in 2019 required less time to complete compared with 2018 (40.5 months (median) compared with 42.1 months (median)). Not surprisingly, APAs requiring the shortest processing times were unilateral APA renewals (30.7 months (median)). As indicated in the 2019 APA Report, of the 18 different measures of processing time (e.g., average vs. median months, unilateral vs. bilateral APA, new vs. renewal APA), all but two measures showed improvement in 2019 compared with 2018. This was accomplished while having the same number of APMA personnel as in 2018 (though with four fewer team leaders and four more economists).
Additionally, APMA released the “functional cost diagnostic model” (“FCDM”) in 2019, which is intended to evaluate whether a one-sided method is the best method for the covered issue(s). The FCDM is complex and requires additional time and resources to apply (and may be contrary to positions held by companies and/or treaty partners), and it is likely that those cases in which APMA requests an FCDM analysis may face higher processing times. However, the FCDM did not appear to increase processing times in 2019. Perhaps the APAs executed in 2019 were too far along in the negotiation process for APMA to require an FCDM analysis. It remains to be seen how widespread use of the FCDM will be going forward.
APA Terms
APA term lengths, including rollback years, averaged six years in 2019 (down from seven years in 2018 and 2017). The largest number of APAs were executed with five-year terms (44% of the total) and 86% had terms of five or more years. In addition to the impact of aging inventory, long APA terms can be a product of complex issues, difficult competent authority negotiations, and the desire for prospective coverage. In 2020, it is possible that the impact of COVID-19 may limit companies’, or treaty partners’, desire to extend proposed APA terms.
TPMs Applied
For 2019, the comparable profits method/transactional net margin method (“CPM/TNMM”) continued to be the most commonly applied TPM for tangible and intangible property transactions (applied to 81% of such transactions). Regarding the profit level indicator (“PLI”) used when the CPM/TNMM is employed, the operating margin (defined as operating profit divided by net sales) was applied 64% of the time – continuing to decline from 85% in 2017 and 68% in 2018. The Berry ratio, return on assets, or other PLIs were applied in the remaining cases, and the 2019 APA Report, unlike pre-2016 reports, does not separately state the number of times that PLIs other than the operating margin were used.
For services transactions, the CPM/TNMM also was the most common TPM with the operating margin or markup on total costs being used as the PLI for a combined 65% of the services transactions. These two PLIs were used a combined 11% less than in 2018.
Conclusion
The streamlined intake processes and the increase in information required by Rev. Proc. 2015-41 was intended to reduce processing time by ensuring APMA started with the information it needed. The effects of these changes perhaps began to bear fruit in 2019 with the general decrease in processing times and slight decrease in inventory. Further, APMA opened its hiring process in early 2020, which potentially could help to further decrease processing times and to alleviate some of the 2018 inventory spike noted above. However, while APMA has been working from home during the pandemic, it is likely that APA processing times around the globe could increase in 2020 due to a general slowdown in negotiations with many treaty partners. Only time will tell the full impact of COVID-19 on APAs (for further insight see APAs: The Quest for Certainty in Times of Uncertainty).
