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Advance pricing agreements can help support NOL carryback refund claims

June 23, 2020 Article 2 min read
Foreign-owned businesses claiming U.S. refunds based on NOL carrybacks can eliminate some uncertainty from the process by reaching an advance pricing agreement with the IRS. Here’s how an APA can help.
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With the return of net operating loss (NOL) carrybacks for 2018-2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the extraordinary economic impact of COVID-19, many businesses will be filing returns in the near future that claim refunds based on NOLs carried back to prior profitable years. Multinational businesses need to prepare for close scrutiny of intercompany transfer pricing policies in countries where significant losses are claimed. In the United States, for instance, any refund claim in excess of $5 million will automatically trigger an IRS audit. With so much on the line, this is an excellent time to review and thoroughly document all transfer pricing decisions. For many businesses, an advance pricing agreement (APA) with appropriate tax authorities could provide an additional level of assurance about the losses being claimed, especially those that involve commonly challenged transactions like large outbound royalties or inventory purchases.

New APAs

Businesses with intercompany transfer pricing policies should be evaluating those policies in light of the economic impacts of COVID-19. Those who expect to file significant refund claims based on NOL carrybacks may get an additional benefit from formalizing their internal policies by entering into an advance pricing agreement with taxing authorities. If the transfer pricing strategy can be agreed upon with authorities before an audit begins, it removes a significant percentage of the uncertainty about the audit’s outcome. If the APA process runs concurrent with the examination, you can get extra benefit out of the work you do to comply with the examination process. An APA reached as part of the audit process will give you some certainty for future periods that your transfer pricing complies with IRS requirements.

Existing APAs

If your business already has an APA with the IRS, it should be evaluated to determine if the economic assumptions on which it’s based are still applicable. Most advance pricing agreements include a list of assumptions about the economic landscape in which the business will operate, and very few of those include any kind of relief for the types of disruption we’ve seen as a result of the pandemic. If you have an existing APA currently in force, it may be worth petitioning for revisions. APAs that come up for renewal in 2020 and 2021 will likely need significant modification to reflect whatever “new normal” the global economy settles into as consumers adapt to the presence of the virus and respective disruptions in their lives.

Multinational businesses need to prepare for close scrutiny of intercompany transfer pricing policies in countries where significant losses are claimed.

Taxing authorities are certainly going to understand that the health and economic impacts of COVID-19 have caused extraordinary losses for many businesses, but that doesn’t mean they will be rubberstamping claims for NOL carrybacks. Multinational businesses will always face the additional hurdle of demonstrating that any loss claimed is properly attributed to the country in which it arose. APAs can help to manage the risk that a taxing authority will challenge losses claimed in a particular jurisdiction.

To learn more about entering into or modifying an APA, please contact your Plante Moran advisor.

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