IRS’s Annual Report Shows Significant Increase in Number of Executed APAs

The IRS on March 29 released Announcement 2024-16, the annual report on the advance pricing agreement (APA) program for calendar year 2023, which shows that significantly more APAs were executed during 2023 than during the prior year.

According to the report, 156 APAs were executed in 2023 (24 unilateral, 130 bilateral, and 2 multilateral) compared with the 77 that were completed in 2022. The term “executed APAs” in the report includes both initial and renewal APAs; since 74 of the 2023 executed APAs were renewals, that means that only 82 of the APAs completed in 2023 were new agreements. 

The number of APA applications filed decreased slightly in 2023, with a total of 167 applications (17 unilateral, 144 bilateral, and 6 multilateral), compared to 183 filed in 2022.

Similarly, the number of pending APAs as of December 31, 2023, decreased slightly, with 558 applications pending (44 unilateral, 480 bilateral, and 34 multilateral), compared to 564 pending in 2022. 

These metrics are summarized in the table below:

APA Applications Filed171446167
Total Executed in 2023241302156
Total Pending as of 12/31/234448034558

The median completion time for an APA, including both unilateral and bilateral APAs, was shortened from 43.4 months in 2022 to 42 months in 2023. Similarly, the median completion time for a new APA went down to 49.9 months in 2023, compared to 53 months in 2022, but the median time for a renewal APA went up to 31.8 months in 2023 from 28.3 months in 2022.

APA Term Length

Rev. Proc. 2015-41, which sets out the procedures for applying for an APA, provides that taxpayers should request an APA term that will cover at least five prospective years. Taxpayers may also request that the APA be “rolled back” to cover one or more earlier taxable years, although the appropriate APA term is decided on a case-by-case basis. 

Not surprisingly, then, a five-year term was the most common term length of those APAs executed in 2023: 70 agreements included five-year terms, 20 had a six-year term, and 31 had a seven-year term. The average term length was six years.

A substantial number of those APAs with terms of greater than five years were submitted with requests for five-year terms, and the additional years were agreed to by the taxpayer and the IRS (or, in the case of a bilateral APA, by the IRS and the foreign government) at the taxpayer’s request to ensure a reasonable amount of prospectivity in the APA term.

Of the APAs executed in 2023, 19% included rollback years. 

Executed APAs

Almost one-third of all bilateral APA applications filed in 2023 involved Japan (30%). India was second (21%), followed by Canada (14%). Of the bilateral APAs executed in 2023, 32% involved Japan, followed by India with 17%, Italy with 11%, and Canada with 8%. Similarly, almost half of the pending bilateral APA requests involved either Japan (25%) or India (23%). 

In terms of the relationship between controlled parties, a majority of APAs – 56% – involved a non-U.S. parent and a U.S. subsidiary, and 37% involved a U.S. parent and a non-U.S. subsidiary. Only 6% involved sister companies, while 1% accounted for all other relationships.

No single type of covered transaction dominated in the APAs executed in 2023: 36% involved tangible property, 44% involved services, and 18% involved intangible property. 

A substantial majority of covered transactions were evaluated using the comparable profits method/transactional net margin method -- 80% for tangible and intangible property transactions and 86% for services transactions.

BDO Insights

Although the number of executed APAs almost doubled in 2023, the completion time for an APA remains lengthy, with an average of approximately 3.5 years to finalize an APA. The number of APAs filed decreased for the first time since 2019, but there continues to be a significant backlog of total pending APAs, with 558 requests. 

However, based on the IRS’s recent announcements regarding the Advance Pricing and Mutual Agreement (APMA) program, it is evident that the IRS acknowledges taxpayers’ interest in enhancing and achieving tax certainty regarding intercompany transactions. 

In April 2023, the IRS released interim guidance on the review and acceptance of APA submissions (see IRM 4.60.3). Through this, the IRS aims to “improve the quality and timeliness of APMA’s APA program by providing an early mechanism for identifying potential roadblocks to successfully concluding a proposed APA and opportunities for other paths to certainty.” In addition, an IRS official indicated in November 2023 that the agency is actively recruiting individuals to work in the APMA program to support its growth, particularly with the additional funding it was given under the Inflation Reduction Act. 

Given these developments, it is likely that APAs will continue to be one of the primary paths to obtain advance certainty regarding intercompany transactions for many multinational companies. APAs also reduce the likelihood of rigorous tax audits and reduce compliance costs over the term of the APA. Taxpayers with complex issues surrounding intercompany transactions should proactively evaluate whether the APA route is the most beneficial course of action for them.