TEI Urges Senate Finance Committee to Retain Program, Maintain Confidentiality.

On March 8, 1999, Tax Executives Institute submitted the following comments to Senator William V. Roth, Jr., chair of the Senate Committee on Finance. TEI's comments, prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is Stephen W. Boocock of Allegheny Teledyne, Inc., took the form of a letter from Institute President Lester D. Ezrati of Hewlett-Packard Company.

Dear Senator Roth:

You recently outlined five criteria for reforming the system of international taxation and later this week the Senate Finance Committee will hold the first in a series of hearings on international tax reform, including the elimination of unnecessary complexity. Tax Executives Institute is developing its comments in respect of your eau for action and intends to file those comments soon. I want to take this opportunity, however, to alert you to an issue that we believe merits immediate consideration. I am referring to the future of the IRS's advance pricing agreement (APA) program -- a program in which you have expressed an interest in facilitating and promoting.

The APA program is designed to forestall contentious and expensive transfer pricing disputes between taxpayers and the IRS. A voluntary venture, it is one of the IRS's success stories of the 1990s and furthers one of your stated goals -- the elimination of unnecessary complexity in the tax law. Each APA specifies a methodology negotiated between the specific taxpayer and the IRS (and, at times, a foreign country) for the taxpayer to use in determining its intercompany pricing and thereby assure compliance with section 482 of the Code. The information set forth in an APA -- the method by which a company determines its profit margins -- is highly fact specific and involves sensitive financial and commercial information. Almost 200 APAs have been negotiated since the program began in 1091 and the program has been used as a model by the international community as a means of minimizing double taxation of income and settling costly transfer pricing disputes.

Since its inception until January 8, 1999, the IRS treated the APAs and their supporting documentation as tax return information that was not subject to disclosure. On that date -- in conjunction with a suit filed by the Bureau of National Affairs for release of the APAs under the Freedom of Information Act -- the IRS notified BNA that the agency now takes the position that APAs constitute "written determinations" under section 6110 of the Code and therefore may be publicly released in a redacted form. TEI believes that the IRS's concession is ill-conceived and we have filed a brief amicus curiae in the case. (For your information, a copy of the brief is enclosed.)

As a professional association dedicated to the development and implementation of sound tax policy, TEI is concerned that the release of the APAs -- even in redacted form -- will adversely affect the APA 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 documents and their ability to compete effectively in the marketplace could be harmed. Moreover, the very redaction process that accompanies release of the information would be extremely difficult, burdensome, and time-consuming.

More important, the knowledge that such information will be released in the future will discourage taxpayers from seeking APAs. 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, programs such as the APA program should actively be encouraged, rather than jeopardized by a mistaken interpretation of the law.

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