H.R. 2378: confidentiality of advance pricing agreements.

July 12, 1999

On July 12, 1999, Tax Executives Institute submitted the following comments to the House Committee on Ways and means concerning the confidentiality of advance pricing agreements.

On behalf of Tax Executives Institute, I am writing to support H.R. 2378, which would preserve the confidentiality of advance pricing agreements (APAs) and background documents related to APAs. TEI urges that the substance of H.R. 2378 be included in the tax bill that the Ways and Means Committee will be crafting in the next few weeks.

The advance pricing agreement program is designed to forestall contentious and expensive transfer pricing disputes between taxpayers and the Internal Revenue Service. A voluntary venture, the APA program represents one of the IRS's success stories of the 1990s, for it furthers the goals of reducing taxpayer burdens and minimizing disputes between the IRS and taxpayers.

Each APA specifies a methodology negotiated between the specific taxpayer and the IRS (and, at times, one or more foreign countries) for the taxpayer to use in determining its intercompany pricing and thereby ensure compliance with section 482 of the Internal Revenue Code. The information set forth in an APA is highly fact specific and involves sensitive financial and commercial information. Almost 200 APAs have been negotiated since the program began in 1991 and the program is a model for minimizing double taxation of income and settling costly transfer pricing disputes before they occur. By reducing taxpayer burdens and enhancing taxpayer certainty, the APA program strengthens the competitiveness of participating U.S. businesses and facilitates the more efficient use of IRS resources.

H.R. 2378 would confirm that the APAs and their supporting documentation will be treated as confidential tax return information pursuant to section 6103 of the Code. The bill thus rejects the argument that APAs are subject to disclosure under section 6110 of the Code. This concession marked a radical change in IRS policy in respect of taxpayer privacy, which lies at the core of section 6103. Since the inception of the APA program until January 8 of this year, the IRS treated the APAs and APA background files as protected tax return information. (Indeed, the IRS provided taxpayers with explicit assurances that the submitted information would be kept confidential.) On January 8, 1999 -- in conjunction with a suit filed under the Freedom of Information Act -- the IRS notified taxpayers that the agency had concluded that APAs constitute "written determinations" subject to release (albeit in redacted form) under section 6110 of the Code. (TEI has filed a brief amicus curiae in the case, opposing the release of the APAs.)

As a professional association dedicated to the development and implementation of sound tax policy, TEI is fully aware of the policy concerns underlying the Freedom of Information Act. Unless the proper balance is struck between taxpayer privacy and "government in the sunshine," however, irreparable harm may be done to the tax system and, more particularly, the APA program. TEI is concerned that the release of APAs and supporting materials, even in reacted form, will adversely affect the program. Taxpayers submitted the pricing information to the IRS with the understanding that the information would be subject to the same confidentiality restrictions as tax returns. Companies' legitimate privacy interests will be compromised by the release of the APA background files and their ability to compete effectively in the marketplace could be harmed. H.R. 2378 would safeguard taxpayers' rights by ensuring that the submitted information remains confidential.

The bill would also require the Treasury Department to issue an annual report on the APA program, which would include information such as a summary of the methodology used in each agreement. This report would provide taxpayers with valuable insight concerning how the IRS administers the transfer pricing provisions of the Code, as well as the administration of the APA program itself. Consistent with the overall concern for confidentiality, the bill provides that the Secretary's primary concern in preparing the reports shall be to protect the identity and privacy rights of the taxpayer. This provision should balance taxpayers' privacy concerns with the policies underlying the Freedom of Information Act. The annual report should also help promote the APA program by making available information about the scope and benefits of the program. Thus, it would encourage more taxpayers to participate in the APA program without sacrificing taxpayers' legitimate privacy interests.

TEI believes that the APA program represents the best way for companies to resolve transfer pricing controversies and avoid costly and time-consuming audits and litigation. At a time when the IRS is seeking more taxpayer-friendly ways of doing business, initiatives such as the APA program should actively be encouraged, rather than jeopardized by a mistaken interpretation of the law.

For the above reasons, TEI strongly supports the inclusion in this year's tax bill of provisions protecting the confidentiality of APAs and their background files.

If you have any questions, please do not hesitate to contact me, at [phone], or Mary L. Fahey of the Institute's professional staff, at [phone].