IRS Needs Specific COVID Data To Review APAs, Official Says

The Internal Revenue Service is willing to revisit multinational corporations' intercompany advance pricing agreements to address issues related to the novel coronavirus pandemic — but only if businesses present specific data, rather than general challenges, an agency official said Tuesday.

If the IRS is going to approach other tax authorities about reviewing companies' APAs due to the pandemic, the agency is going to need "cold, hard data," according to John Hughes, director of the IRS' Advance Pricing and Mutual Agreement Program. This data is needed to review transfer pricing results that may have fallen outside the range agreed to in an APA, he said, speaking during a webinar hosted by the New York University School of Law's international tax program.

"It is not going to work with a kind of generalized claim of difficulty or challenge presented by 2020," Hughes said. "We need to know exactly what happened with your business and exactly what is the assistance that you're seeking."

An APA is a negotiated settlement between a U.S. corporation and APMA — and sometimes a foreign tax authority — on the pricing of assets that generate income across borders. Under the arm's-length standard, those prices must be set at what independent parties would have paid, under the same economic conditions. Once set, the terms of an APA will generally last for five years and cannot be challenged by the IRS through the normal audit and adjustment process.

The novel coronavirus, which causes the respiratory disease COVID-19, has led to economic turmoil that could affect companies' APAs. The IRS has acknowledged this possibility, announcing in May that it was in contact with treaty partners about "the application of transfer pricing methods in periods of economic distress" and other technical issues.

Hughes on Tuesday noted that for companies that are still negotiating their APAs, there's typically "a good deal of flexibility" that APMA can exercise with its competent authority counterparts. For example, the terms of the agreement could be shortened or lengthened to contextualize a company's 2020 results, he said.

For companies that have already executed APAs, "the situation can present some difficulties, some challenges, and we recognize that at APMA," Hughes said. He noted that if corporations want APMA to talk with a treaty partner about an existing agreement, businesses should put together concrete data to help facilitate discussions between the two competent authorities.

"I think I speak on behalf of all competent authorities," Hughes said. "None of us are looking to reopen APAs and just have a whole new workstream for 2021, so anything that taxpayers can do to facilitate that will be helpful."

Hughes' comments follow remarks he made during a webinar in October, when he said the pandemic doesn't necessarily justify a change of transfer pricing method for companies that already have concluded an APA.

The IRS is willing to listen to arguments that a company's circumstances have changed so completely that a transfer pricing method needs to be revisited or reviewed, Hughes said during a webinar hosted by Baker McKenzie on Oct. 20. But in agreeing to the method, APMA personnel are "very mindful of the possible outcomes that may unfold," he said.

"To go back just because there's some broader, macroeconomic downturn, doesn't necessarily mean we should be revisiting the TPM," Hughes said.

--Additional reporting by Alex M. Parker and Molly Moses. Editing by Vincent Sherry. 

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