Senior finance and tax executives may be wondering whether their companies should work with the Internal Revenue Service on transfer-pricing agreements after learning about the agency’s latest progress report. The IRS revealed in April that it processed fewer advance pricing agreements (APAs) in 2011, while the average time the agency takes to process such deals rose to 40.7 months from 37.2 months in 2010.
That means companies that have turned to the IRS to bring certainty to their intercompany transactions (for a $50,000 fee) may have to wait three and a half years or more to get an answer. “Taxpayers, advisers, and governments, as well as the IRS, have become frustrated with how long these cases can take,” says Rocco Femia, a partner at law firm Miller & Chevalier.
The IRS completed just 42 APAs last year, below its annual average of 48 between 1991 and 2010 — even though it received only 96 new applications, a 33% decline from its all-time high of 144 applications in 2010. David Canale, Americas director of Ernst & Young’s transfer-pricing controversy services, says the IRS’s processing has experienced a “severe slowdown” over the past year and a half.
Part of the reason for the slowdown (the IRS had 445 pending cases as of the end of 2011) is the involvement of other governments: nearly 80% of the companies that filed applications last year sought bilateral agreements. In such arrangements, the IRS and another tax authority agree on final terms, providing more certainty to corporate taxpayers but adding to turnaround time.
Moreover, the IRS has slowed down its sign-offs in an effort to make its decisions more consistent among companies within the same industry. Simpler cases have often been put on hold while the IRS waited for other, more complicated ones to work their way through the system for comparison, according to Canale.
For its part, the IRS reorganized earlier this year, merging the Office of the U.S. Competent Authority, which handles transfer-pricing cases with foreign jurisdictions, with its APA Program, and hiring new employees. “Any changes that reduce the amount of time it takes to process agreements — whether because of an increase in staffing or better execution — would be beneficial to the taxpayer,” says Femia.