IRS Reports on Advance Pricing Agreements for 2021

ANNOUNCEMENT AND REPORT
CONCERNING
ADVANCE PRICING AGREEMENTS

March 22, 2022

This Announcement is issued pursuant to § 521(b) of Pub. L. 106-170, the Ticket to Work and Work Incentives Improvement Act of 1999, which requires the Secretary of the Treasury to report annually to the public concerning advance pricing agreements (APAs) and the Advance Pricing and Mutual Agreement Program (APMA Program), formerly known as the Advance Pricing Agreement Program (APA Program). The first report covered calendar years 1991 through 1999. Subsequent reports covered each calendar year 2000 through 2020 separately. This twenty-third report describes the experience, structure, and activities of the APMA Program during calendar year 2021. It does not provide guidance regarding the application of the arm's length standard.

Part I of this report includes information on the structure, composition, and operation of the APMA Program; Part II presents statistical data; and Part III includes general descriptions of various elements of the APAs executed in 2021, including types of transactions covered, transfer pricing methods used, and completion time.

Nicole L. Welch
Acting Director, Advance Pricing and Mutual Agreement Program

Part I. The APMA Program — Structure, Composition, and Operation

[Pub. L. 106-170 § 521(b)(2)(A)]

In February 2012, the former APA Program was moved from the Office of Chief Counsel to the Office of Transfer Pricing Operations¹ within the Large Business and International Division of the IRS and combined with the U.S. Competent Authority staff responsible for transfer pricing cases, thereby forming the APMA Program (APMA).

As of December 31, 2021, APMA's APA cases were handled by 80 team leaders, 25 economists, 9 managers, and 3 assistant directors.² Each assistant director oversees three managers who lead teams consisting of both team leaders and economists. APMA's main office is in Washington, DC, and it also has offices in northern California (San Francisco and San Jose), southern California (Los Angeles and Laguna Niguel), Chicago, and New York.

On August 31, 2015, a new revenue procedure governing APA applications was published in 2015-35 I.R.B. on page 263. Revenue Procedure (Rev. Proc.) 2015-41 provides guidance, information and instructions on APA requests and the administration of APAs. Rev. Proc. 2015-41 updates and supersedes Rev. Proc. 2006-9, 2006-1 C.B. 278, as modified by Rev. Proc. 2008-31, 2008-1 C.B. 1133, which is also superseded.

Model APAs appear as appendices to this report. Appendix 1 is the model for APAs covered by Rev. Proc. 2006-9. Appendix 2 is the current model APA for APAs covered by Rev. Proc. 2015-41. A list of primary APMA contacts is available at https://www.irs.gov/businesses/corporations/apma-contacts.

Part II. APMA Program Statistical Data

[Pub. L. 106-170 § 521(b)(2)(C)(i-viii)]

Table 1: APA Applications Filed 
§ 521(b)(2)(C)(i)

	Unilateral	Bilateral	Multilateral	Total
Filed 1991-19993				401
Filed 2000-2020	637	1,724	29	2,390
Filed in 2021	16	121	8	145
Total Filed 1991-2021				2,936

The charts above illustrate the number of complete applications filed per year and the bilateral requests received in 2021 per foreign country. As of December 31, 2021, APMA had also received 29 user fee filings that were not yet accompanied by substantially complete APA applications, in addition to the 145 complete APA applications.

Table 2: Executed⁴ and Pending APAs 
§ 521(b)(2)(C)(ii-vi)

	Unilateral	Bilateral	Multilateral	Total
Total Executed 1991-2020	662	1,385	20	2,067
Total Executed in 2021	25	98	1	124
Total Executed 1991-2021	687	1,483	21	2,191
Total Pending as of 12/31/2021	39	395	27	461
Renewals Executed in 20215	19	59	0	78
Renewals Pending6 as of 12/31/2021	26	147	12	185

In 2021, the percentage of renewals executed increased (63 percent of all APAs executed in 2021 versus 59 percent in 2020). The charts above illustrate trends in the number of APAs executed per year and the countries involved in the bilateral APAs that were executed in 2021.

As the top chart illustrates, the number of pending requests increased slightly relative to December 31, 2020. As of December 31, 2021, almost half of the pending bilateral APA requests involved either Japan or India.

Table 3: APAs Revoked or Cancelled and Applications Withdrawn 
§ 521(b)(2)(C)(vii)

	Unilateral	Bilateral	Multilateral	Total
Revoked or Cancelled in 2021	0	0	0	0
Total Revoked or Cancelled 1991-20217				11
Applications Withdrawn in 2021	1	4	1	6
Total Applications Withdrawn 1991-20218				279

Table 4: APAs Executed in 2021 by Industry 
§ 521(b)(2)(C)(viii)

Industry
Manufacturing	46
Wholesale/Retail Trade	47
Services	17
Management	8
Finance, Insurance, and Real Estate	4
All Other Industries	2

Table 4a: Manufacturing APAs Executed in 2021

Type of Manufacturing
Transportation Equipment	17
Chemical	10
Computer and Electronic Products	5
Miscellaneous9	4
Machinery	3
All Other Manufacturing	7

Table 4b: Wholesale/Retail Trade APAs Executed in 2021

Type of Wholesale/Retail Trade
Merchant Wholesalers, Durable Goods	29
Merchant Wholesalers, Nondurable Goods	9
Motor Vehicle and Parts Dealers	4
All Other Wholesalers	5

Part III. General Descriptions of APAs Executed in 2021

[Pub. L. 106-170 § 521(b)(2)(D) and (E)]

Nature of the Relationships
§ 521(b)(2)(D)(i)

As in prior years, more than half of the APAs executed in 2021 involved transactions between non-U.S. parents and U.S. subsidiaries.

Covered Transactions, Functions and Risks, and Tested Parties
§ 521(b)(2)(D)(ii-iii)

Most of the transactions¹⁰ covered in APAs executed in 2021 involve the sale of tangible goods or the provision of services. Fifteen percent of the transactions involve the use of intangible property, which can be among the most challenging transactions in APMA's inventory.

In the majority of APAs, the covered transactions involve numerous business functions and risks. For instance, with respect to functions, APAs involving manufactured products typically involve a controlled group that conducts research and development (R&D), engages in product design and engineering, manufactures the product, markets and distributes the product, and performs support functions such as legal, finance, and human resources. Regarding risks, the controlled group may assume a variety of risks, including market risks, R&D risks, financial risks, credit and collection risks, product liability risks, and general business risks. In the APA evaluation process, a significant amount of time and effort is devoted to understanding how the functions and risks are allocated among the controlled group of companies that are party to the covered transactions. For methods requiring the selection of a tested party, the tested party chosen generally will be the least complex of the controlled taxpayers.

Consistent with prior years, a majority of tested parties¹¹ in 2021 were U.S. distributors, U.S. manufacturers, or U.S. service providers.

Transfer Pricing Methods Used
§ 521(b)(2)(D)(iv)

In 2021, the most commonly used transfer pricing method (TPM) for both the sale of tangible property and the use of intangible property continued to be the comparable profits method/transactional net margin method (CPM/TNMM). The CPM/TNMM was used for 85 percent of these types of transactions.

For covered transactions involving tangible and intangible property that used the CPM/TNMM, the operating margin (OM) is still the most common profit level indicator (PLI) used to benchmark results. It was used 65 percent of the time. Other PLIs, such as the Berry Ratio and return on total cost, made up the other 35 percent. As used here, “OM” is defined as the ratio of operating profit to sales,¹² and “Berry Ratio” is defined as the ratio of gross profit to operating expenses.¹³ Most services transactions (90 percent) also used the CPM/TNMM with the OM and operating profit to operating expense being the most common PLIs (used 56 percent of the time).¹⁴

Sources of Comparables, Comparables Selection Criteria, and Nature of Adjustments to Comparables or Tested Party Data 
§ 521(b)(2)(D)(v-vii)

For the APAs executed in 2021 that involved the CPM/TNMM with a North American tested party, the most widely used data source for comparables was Standard and Poor's Compustat/Capital IQ database. Different sources were used in other cases (e.g., where the tested party was not a U.S. or Canadian entity or where transaction-based methods were applied). The other most commonly used databases are listed in the table below.

Table 5: Sources of Comparable Data

Bureau van Dijk (BvD)	Prowess
Global Vantage	RoyaltySource
ktMINE	RoyaltyStat
Orbis

In making comparability adjustments, typical balance sheet adjustments, as identified in Treas. Reg. §§ 1.482-1(d)(2) and 1.482-5(c)(2)(iv), were made in most cases, including where appropriate, adjustments for payables, receivables, and inventory. In addition, where appropriate, adjustments for different accounting practices were made to convert from LIFO to FIFO inventory accounting, and a small number of cases involved the accounting reclassification of expenses, e.g., from COGS to operating expenses.

Ranges, Goals, and Adjustment Mechanisms 
§ 521(b)(2)(D)(viii-ix)

Most transactions covered in APAs target an interquartile range as described in Treas. Reg. § 1.482-1(e)(2)(iii)(C). Where the transaction involves a royalty payment for the use of intangible property, both specific royalty rates and ranges have been used. Where the covered transaction is the sale or license of intangible property, and the payment for such transfer would be a royalty based solely on external comparable uncontrolled transactions, a secondary or confirming method, e.g., a test of the post-royalty operating margin or cost-plus mark-up, has sometimes also been used. The testing periods of the APAs executed in 2021 were either a single year, the term of the APA only, or the term of the APA plus rollback years.

APAs executed in 2021 included several mechanisms for making adjustments to the tested party results when the results fall outside the interquartile range or do not match the point required by the APA. Examples of the mechanisms used include an adjustment bringing the tested party's results for a single year to either the closer edge of the range or the median of the range, an adjustment to bring the results over the APA term to the closer edge of the range, or an adjustment to bring the results to a specified point or royalty rate.

Critical Assumptions 
§ 521(b)(2)(D)(v)

The model APAs used by the IRS (included as Appendix 1 and Appendix 2 of this report) include standard critical assumptions that there will be no material changes to the taxpayer's business or to its tax or financial accounting practices during the APA term. A few bilateral cases have also included critical assumptions tied to the taxpayer's profitability in a certain year or over the term of the APA. Pursuant to § 7.06(3) of Rev. Proc. 2015-41, APMA will cancel an APA in the event of a failure of a critical assumption unless the parties agree to revise the APA.

Term Lengths of APAs Executed in 2021 
§ 521(b)(2)(D)(x)

Table 6: Term Lengths of APAs Executed in 2021

Term Length (years)	Number of APAs
1	2
2	1
3	2
4	6
5	73
6	19
7	6
8	5
9	3
10	4
12	2
15	1
Average	6

As described in § 3.03(1) of Rev. Proc. 2015-41, taxpayers should request an APA term that would cover at least five prospective years and 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. Of the APAs executed in 2021, 22 percent included rollback years. A substantial number of those APAs with terms of greater than five years were submitted as a request for a five-year term, and the additional years were agreed to between the taxpayer and the IRS (or, in the case of a bilateral APA, between the IRS and the foreign government upon the taxpayer's request) to ensure a reasonable amount of prospectivity in the APA term.

Amount of Time Taken to Complete New and Renewal APAs
§ 521(b)(2)(E)

Table 7: Months to Complete New and Renewal APAs Executed in 2021

	Unilateral		Bilateral		Unilateral & Bilateral
	Average	Median	Average	Median	Average	Median
New	24.5	23.5	52.3	49.2	48.5	45.2
Renewal	24.3	26.1	37.1	35.1	34.0	30.9
New & Renewal	24.4	26.1	43.0	36.6	39.2	35.1

Although the median time required to complete an APA increased in 2021 to 35.1 months (versus 32.7 months in 2020), it remains lower than the median completion times in 2019 (38.8 months) and in 2018 (40.2 months).

Efforts to Ensure Compliance with APAs 
§ 521(b)(2)(F)

As described in § 7.02(1) of Rev. Proc. 2015-41, taxpayers are required to file annual reports to demonstrate compliance with the terms and conditions of their APAs. The filing and review of these annual reports are critical parts of the APA process. Through annual report review, the APMA Program monitors taxpayer compliance with APAs on a contemporaneous basis. Annual report review also provides current information on the success or problems associated with the various TPMs adopted in the APA process.

Nature of Documentation Required in Annual Report
§ 521(b)(2)(D)(xi)

APAs require taxpayers to file timely and complete annual reports describing their operations and demonstrating compliance with the APA's terms and conditions. Not every annual report will include each of the items listed in the following table; they are required where the facts demonstrate a need for such documentation.

1.	Statement regarding all material differences between Taxpayer's business operations during APA year and description of Taxpayer's business operations contained in Taxpayer's APA request. If there are no material differences, a statement to that effect.
2.	Statement concerning all material changes in Taxpayer's accounting methods and classifications, and methods of estimation, from those described or used in Taxpayer's request for the APA. If there has been no material change in accounting methods and classifications or methods of estimation, a statement to that effect.
3.	Any change to the Taxpayer notice information.
4.	Description of any failure to meet critical assumptions. If there has been none, a statement to that effect.
5.	Statement identifying whether any material information submitted while the APA request was pending is discovered to be false, incorrect, or incomplete.
6.	The amount, reason for, and financial analysis of any compensating adjustment, for the APA year, including but not limited to the amounts paid or received by each affected entity; the character (such as capital or ordinary expense) and country source of the funds transferred, and the specific line item(s) of any affected U.S. tax return; and any change to any entity classification for federal income tax purposes of any member of Taxpayer's group that is relevant to the APA.
7.	The amounts, description, reason for, and financial analysis of any book-tax difference relevant to the TPM for the APA year, as reflected on Schedule M-1 or Schedule M-3 of the U.S. return for the APA year.
8.	Statement regarding whether Taxpayer contemplates requesting, or has requested, to renew, modify, or cancel the APA.
9.	Financial statements and any necessary account detail to show compliance with the TPM, with a copy of the opinion from an independent certified public accountant or other documentation required by paragraph 5(f) of the APA.
10.	Financial analysis demonstrating Taxpayer's compliance with TPM.
11.	Organizational chart.
12.	A copy of the APA and any amendment.
13.	A penalty of perjury statement.

Approaches for Sharing of Currency or Other Risks
§ 521(b)(2)(D)(xii)

In appropriate cases, APAs may provide specific approaches for dealing with risks, including currency risk, such as adjustment mechanisms and/or critical assumptions.