In general, tax administrations aren't eager to begin revisiting advance pricing agreements, said John C.C. Hughes, director of the IRS Advance Pricing and Mutual Agreement program. Speaking during a webinar hosted by Grant Thornton LLP, he noted that "we have enough in the pipeline right now."
While the IRS isn't averse to talking with tax treaty partners about existing advance pricing agreements, or APAs, businesses should monitor their situations for now, and then perhaps prepare to talk to the agency, Hughes said.
"A lot of what we have to do right at this point is wait and see," he said. "I think a lot of the data and the magnitude of the issues that we might need to face — we really won't see those things arise until early 2021."
An APA is a negotiated settlement between a U.S. corporation and the IRS Advance Pricing and Mutual Agreement program, and sometimes a foreign tax authority, on the pricing of assets that generate income across borders. Under a bilateral APA, a company can request assistance from the U.S. competent authority to resolve a dispute with a foreign tax administration over potential double taxation. Bilateral agreements are normally negotiated under the tax treaties the U.S. has with other governments.
The IRS in May announced that it was in contact with treaty partners about how the economic turmoil provoked by the pandemic could affect existing advance pricing agreements, which often rely on economic assumptions in their pricing analysis.
As for transfer pricing in general, the agency in April released guidance for situations when unexpected circumstances cause losses for one member of a multinational group. The guidance, in the form of frequently asked questions, addressed problems the IRS has encountered with transfer pricing documentation, as well as how the documentation should memorialize unusual situations, such as those causing losses for a distributor.
Although April's guidance was more general than the APA context, it's consistent with comments Hughes made during Thursday's webinar, according to Steven Wrappe, the transfer pricing technical leader at Grant Thornton.
Wrappe, who spoke during the webinar, told Law360 afterward that while the pandemic may have affected a company's transfer pricing, that doesn't necessarily mean it needs to change its APA. Rather, there should be a case-by-case evaluation, he said.
"How did the pandemic affect your transactions?" he asked. "How did those transactions interact with your analyses? And is that enough that we should change the way that your pricing works between related parties?"
Wrappe added: "For transfer pricing, there's a certain level of uniqueness. That uniqueness is heightened by the impact of the pandemic on different companies."
--Additional reporting by Alex M. Parker and Molly Moses. Editing by Joyce Laskowski.
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