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March 9, 2021

US IRS's advance pricing and mutual agreement program director discusses taxpayers' treatment of COVID-related costs

The United States (US) Internal Revenue Service’s (IRS) program to resolve transfer pricing disputes (Advance Pricing and Mutual Agreement Program (APMA)) is seeing "questionable treatment of COVID-related costs," according to an article in Tax Notes Today.1

APMA director John Hughes said 5 March 2021, at the Federal Bar Association conference, that the APMA is seeing the following COVID-related issues: (i) taxpayers are classifying costs as nonoperating items to improve the controlled party's operating profitability for purposes of a comparable profits method or transactional net margin method analysis, which may result in a compensating adjustment; and (ii) taxpayers with an advance pricing agreement nearing the end of its term are raising COVID-related issues prematurely, which may complicate bilateral competent authority negotiations.

Zeb Kelley, senior counsel for branch 6 of the IRS's Office of Chief Counsel, added that he is seeing taxpayers invoking force majeure to terminate arrangements, according to the article. "If there is reason to believe that unrelated parties in the same circumstances would not invoke force majeure, it raises questions," Kelley said. The arm's-length standard may require one of the parties to compensate the other for terminating the arrangement, Kelley added.

Kelley also said that the IRS is "eager" to finalize some version of the expired 2015 aggregation regulation and update the Internal Revenue Code Section 482 regulations to reflect the Tax Cuts and Jobs Act, according to the article.


Taxpayers should be cautious when taking non-conventional transfer pricing positions as a result of COVID-19. Although many of these issues have not yet been challenged, the comments by APMA director John Hughes' make it clear that they are on the IRS's radar. Furthermore, taxpayers that already have advance pricing agreements should consider all complications that may arise before attempting to raise COVID-related issues prematurely or invoking force majeure to terminate the arrangement entirely.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), International Tax and Transaction Services – Transfer Pricing Controversy, Washington, DC



  1. Ryan Finley, APMA Wary of Creative COVID-Related Transfer Pricing Positions, Tax Notes Today (8 March 2021).

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