Clark Armitage Comments on Advance Pricing Agreements Backlog at IRS

With a shrunken staff, it's taking longer than ever for the Internal Revenue Service to process advance pricing agreements as demand doubled last year for the agency to approve how transactions between US companies and foreign affiliates are taxed.

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"They cannot continue to process the cases at the pace they've been doing, or else your average time to process them is going to increase materially," said J. Clark Armitage, a Caplin & Drysdale partner and a former deputy director of the agency's Advance Pricing and Mutual Agreement Program.

Each of the 56 teams processing advance pricing agreements executes about two agreements per year, and there are now more than eight applications pending per team, compared with less than six in 2014.

"That's about four years of work not counting what they receive over the next four years," Armitage said. "They clearly need more staffing."

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The surge in applications for multilateral pricing agreements probably stems from global financial services companies affected by relatively new guidelines on the pricing of intangibles from the Organization for Economic Co-operation and Development, Armitage said.

OECD's so-called DEMPE tax guidelines, covering development, enhancement, maintenance, protection and exploitation of intangibles, are a significant change in the traditional "arm's length" method used in transfer pricing. "DEMPE creates potential for profitability in a lot more places," Armitage said.

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Excerpt taken from the article “Record Demand, Record Backlog for Advance Pricing Agreements Last Year” by Paul Merrion for MLex US Tax Watch.