What's new? What's missing? The IRS updates APA procedures.

In July, the Internal Revenue Service issued Rev. Proc. 2004-40, (1) the long-in-the-works update of the procedural rules for obtaining and maintaining Advance Pricing Agreements (APAs) on intercompany transfer pricing.

The APA Program was launched in 1991 (2) and refurbished in 1996. (3) With about 100 new applications submitted annually in the last few years and the increased experience of completing 500 APAs, the IRS should be in a position to refine, streamline, and, as needed, amplify the APA Program's procedural requirements. Given the concerns of both the taxpayer community and the IRS about the lengthy processing time for APAs, one would particularly hope to see procedural changes designed to expedite the process.

In fact, the revisions are mostly evolutionary, rather than innovative. (4)

* No special new steps are proposed to shorten processing time, though several aspects have that potential, e.g., increased reliance on electronic media and certain expedited renewal procedures. The APA request contents have been made more comprehensive, rather than winnowed, on the ground the additional information will eventually be needed so up-front submission will be more efficient. This is a critical bet that should be evaluated quickly.

* Features to enhance the prospectivity of APAs are stressed.

* The APA Program's direction is increasingly focused on bilateral APAs.

A recurrent theme is requiring a continuous flow of updated information to the IRS to enhance the "best"-ness of the result (and perhaps to enhance the perceived integrity of the APA Program in the face of the current Senate Finance Committee inquiry). (5)

This article explores the changes reflected in Rev. Proc. 2004-40 and the implications for the APA customer base. (6) This is not a detailed instruction booklet--after all, that is Rev. Proc. 2004-40's job--but rather a look at the effect on the social phases of APA participation. Rev. Proc. 2004-40 applies to APA requests, including renewal requests, received on or after August 18, 2004. By mutual agreement, it may also apply to any APA request pending on that date.

Shall We Dance? Scope and Emphasis of the APA Program

Although reworded and rearranged a bit, the central goals and scope of the APA Program are largely unchanged--to promptly and fairly resolve transfer pricing issues in a principled and cooperative manner on a prospective basis. References to principles of sound and efficient tax administration, along with "proper" resolution of APA requests, have been added. There are fewer references to flexibility.

Rev. Proc. 2004-40 continues to emphasize bilateral (as opposed to unilateral) APAs (7) and to favor rollback of the agreed transfer pricing methodology (TPM) to open tax years. (8) Indeed, the bilateral incentive may be boosted by a revision to the rollback policy. Specifically, Rev. Proc. 200440 retracts the rollback policy for unilateral APA requests if the rollback would reduce taxable income for a pre-APA year, citing the regulatory provision that prevents affirmative favorable use of section 482 of the Internal Revenue Code by a taxpayer other than in an original return. (9) Thus, a taxpayer seeking refunds for pre-APA years under its TPM would be well advised to undertake a bilateral APA process.

Getting to Know You: Revised Contents of the APA Request

Rev. Proc. 2004-40 first enunciates several new "general principles" for an APA submission. (10) These are significant formal changes, although reflective of existing best practices by APA Program team leaders and experienced practitioners.

* A comprehensive table of contents is required.

* Documents available in electronic format must be submitted on either a CD-ROM or a diskette, as well as on paper.

* The submission (and any supporting documenta tion) must be supplemented to correct or update all material information (a) within 30 days of an IRS request, (b) before the start of Competent Authority (CA) negotiations in the case of a bilateral or multilateral APA, and (c) prior to execution of the APA.

* As taxable years are completed while the APA is pending, the taxpayer must update its submission to show the application of the proposed TPM to its actual financial results within 120 days after the close of each year. (11)

* Justification of the user fee amount must be provided.

Additional requirements for the submission include: (12)

* SIC codes, NAICS codes, and LMSB industry designation.

* Identification of any branches or disregarded entities (indicating potential attention to related tax effects).

* Estimated dollar value of the proposed covered transactions for each year of the proposed term.

* Information regarding any commission sales income of the tested party. This requirement raises the profile of this rather controversial issue, which was discussed in a 2003 revision of the IRS's APA Program New Hire Training Manual. (13) The concern is whether commission income may distort the tested party's results from a comparability perspective. Accordingly, the APA request must include a proposal and analysis of whether it is appropriate, in the taxpayer's situation, that commission income be separately tested, excluded, or adjusted for (to account for the functional differences between commission sales and buy-sell transactions), or that the TPM be consistent with a sales function.

* Analysis of (a) relevant contractual terms, (b) relevant economic conditions, and (c) "relevant non-recognition transactions." The boundaries of (c) are unexplained and may go beyond exchanges or corporate reorganizations to matters having economic effect that are not reflected on financial statements.

* Electronically formatted financial data on the proposed comparables (and pertinent licenses or other agreements). Moreover, the taxpayer must update the comparables data, if requested, following 90 days after the close of its fiscal year.

* Information on foreign currency exchange risk (suggesting more substantive focus on this issue).

* If rollback years are under consideration by IRS Appeals, a waiver by the taxpayer of its rights, un der the ex parte communication prohibition rules, to be present during communications between the Appeals Office and the APA Team members. (14)

Revisions to the requirements for cost-sharing arrangements (CSAs) (15) reflect the IRS's increased concern with potential revenue loss from aggressive CSA structures:

* The taxpayer must include a statement that the CSA conforms with the qualification requirements of Treas. Reg. [section] 1.482-7(b). Technically, this is somewhat circular since part of the purpose of an APA is to confirm, for example, the core qualification requirement of an appropriate correlation between cost shares and anticipated benefits. Nevertheless, having the taxpayer affirm its belief seems unobjectionable, assuming this will eventually be confirmed in the APA document.

* Not surprisingly, given the recent amendments to the regulations (16) and the pending litigation, (17) taxpayers must state how stock-based compensation is treated under the CSA.

* More specific information is required on any buy-in or buy-out payment, including a complete economic analysis supporting the payment and an analysis demonstrating that the method used to value the pre-existing intangibles and calculate the payment meets the best method test.

* More detail must be shown in the seven years of gross and net profit data required (five past and two projected years).

* The submission must include evidence of compliance with the regulatory requirement to attach a statement regarding the CSA to the pertinent U.S. tax returns or Forms 5471/5472. (18)

* Favorably, somewhat less detail is required on CSA participants and contractual terms.

Interestingly, Rev. Proc. 2004-40 opens the door to a partial APA covering only the CSA or only the related buy-in transaction--if the taxpayer can satisfactorily explain why such a limited APA is consistent with the principles of the APA process. If the request is limited to the buy-in, the APA must have a critical assumption that the CSA meets the regulatory requirements.

Developing the Relationship: Differences in the Process

Currency (Temporal, not Monetary)

To date, the APA process has been driven by the material in the initial application, supplemented on an ad hoc basis by (a) responses to IRS questions and negotiating developments, (b) business developments the taxpayer feels it appropriate to bring to the IRS's attention, and (c) information requested as part of the bilateral CA negotiation process. Tension often exists between trying to move through the negotiation of complex situations on a relatively static basis and reflecting business changes on a current basis. As previously stated, Rev. Proc. 2004-40 modifies the process to uniformly require more updating during the process, through annual TPM calculations, annual updates of comparables data upon request, and overall factual up-dates at several key points in the process and on request. Benchmarking may be facilitated by the full-term covered transaction estimates required in the submission (as well as the profitability estimates required for CSAs), though optimally the IRS recognizes the vagaries of estimates.

Moreover, the taxpayer's disclosures must be supplemented during the process or after the APA is executed if the taxpayer discovers that the information previously submitted was materially incomplete, inaccurate, or incorrect--or if the described facts or business practices have changed or will change. (19) The latter requirement is quite broad, is not tempered by a materiality standard, and is an ongoing obligation, independent of the regular APA annual report requirements. This requirement is located in the section dealing with perjury statements and expressly refers to the potential for cancellation or revocation of the APA. More delineation of the intended scope of this provision is needed.

The net effect of these changes on the speed, substance, and cost of APA negotiations remains to be seen. Although one can imagine circumstances where updates help tailor the TPM, the challenge of dealing with a moving target in real time could in other cases decelerate or derail the process.

One other stick is added to encourage taxpayers to do their part in keeping cases moving. If the government's evaluation of a request is delayed due to the taxpayer's lack of responsiveness or timeliness, the IRS may deem the request to have been filed later than its actual filing, thereby delaying the start of APA coverage. (20)

Relationship to CA Negotiations

Rev. Proc. 2004-40 takes some small steps, consistent with current best practices, to improve the related CA process. (21) These provisions--which track closely the Operational Guidance for bilateral APAs just issued by the Pacific Association of Tax Administrations (PATA), comprising the United States, Australia, Canada, and Japan (22)--include:

* Requiring (rather than "encouraging") as a general matter that taxpayers submit APA requests and related correspondence simultaneously to the U.S. and foreign CAs. (23)

* Stressing the attendance of CA representatives at prefiling conferences (PFCs). (24)

* Imposing an affirmative obligation on taxpayers to identify relevant concerns that may affect CA negotiations, e.g., handling sensitive information such as trade secrets. (25)

* Confirming that the taxpayer is to be provided the substance of the APA Program's recommended CA negotiating position and an opportunity to comment thereon. (26)

Unlike the 2003 APA Report, Rev. Proc. 2004-40 does not specify that the taxpayer's disagreement on any elements should be noted when the position paper is sent to the CA Office. It would be regrettable if the APA Program is retreating from that practice.

There is much yet to be done to accelerate the CA part of the process, although this is largely outside the APA Program's jurisdiction. Efforts to engage the U.S. CA representative more deeply in the first part of the APA negotiations should be encouraged, both to obtain the benefits of the representative's knowledge of the particular CA dynamics at the earliest point and to facilitate the later hand-off.

Of particular note, the PATA Guidance targets a two-year start-to-finish time frame for bilateral APAs, which would represent a dramatic improvement. One important suggested mechanism for moving cases faster is to have joint PFCs or post-filing fact-finding sessions involving both CAs, the taxpayers, and even examination personnel.

Processing Time

The processing objectives of the APA Program are explicitly stated as completion of a unilateral APA or the recommended U.S. negotiating position for a bilateral or multilateral request within 12 months from the date the "full request" is filed. The previous objective for a bilateral/ multilateral case, as stated in the 2003 APA Report, was nine months. APA Director Matthew Frank recently observed that the 12-month target was adopted because it was more indicative of the APA Program's experience. (27) This is also the target in the PATA Guidance, which (as noted) adds an overall two-year objective.

One potential efficiency point not mentioned in Rev. Proc. 2004-40 but recently stressed by the APA Director is to address hard issues very early, rather than late, in the process. (28)

Other Processing Points

Rev. Proc. 2004-40 also:

* Notes that the APA team ordinarily includes an APA Program or field economist, and that the international examiner's manager and other field personnel may participate. (29) These practices have long been noted in the annual APA reports, but interestingly Rev. Proc. 2004-40 does not contain the 2003 APA Report's mention of including LMSB international technical advisers.

* Omits Rev. Proc. 96-53's provision (30) that negotiations between the taxpayer and the APA Team should be documented by means agreed between the parties. Presumably, such memorialization is still permitted on an ad hoc basis, since it can be a useful device.

* Clarifies that the APA Director is the IRS party with whom a taxpayer is entitled to a conference of right in the event rejection of the APA is proposed, and is also the person with the discretion to grant other conferences. (31)

* Incorporates the 1999 law change that explicitly provides for the confidentiality of APAs and related information as return information and references the non-identifying disclosures in the APA Program's published annual reports. (32)

Tightening the Bolts

One undercurrent in Rev. Proc. 2004-40 is an emphasis on the veracity and integrity of the APA Program. Whether this reflects memorialization of the APA Program's due diligence responsibilities, experienced-based concerns, or a desire to assuage outside overseers or critics, is not stated. For example:

* Taxpayers are put on notice that in some cases, the APA Program may require that the scope of proposed covered transactions be expanded or contracted. (33)

* The statement of principles emphasizes that the APA Director's actions to implement Rev. Proc. 2004-40 may not be contrary to statute, regulation, or treaty. (34)

* Numerous fact correction and updating obligations are imposed during and after the APA process and with respect to annual reports.

* Confirmation must be provided with respect to various tax return obligations. (35)

User Fees

The user fee of $25,000 per APA request is reduced to $7,500 for each additional APA request within a single filing, with a maximum fee of $50,000 for a filing. (36) This volume discount should encourage taxpayers to seek coverage of multiple business lines.

The concept of an APA request has been restated slightly as one that "concerns a specific TPM and distinct facts, such that a review of the facts will determine the suitability of the TPM and all other methodologies under consideration." (37) Rev. Proc. 2004-40 omits examples illustrating the similar concept in Rev. Proc. 96-53. It remains to be seen how narrowly this definition will be interpreted, but it is clear that additional attention will be given to this determination (viz., the user fee justification required in the APA request (38)). Rev. Proc. 2004-40 also permits the IRS to treat the situation as an entirely new APA request (39) and require an additional user fee if the taxpayer (but not the IRS or a foreign CA) requests substantial changes to the originally proposed TPM or proposed covered transactions during the process. (40) As before, additional user fees may be requested after submission if it turns out that the request does not meet the specified criteria. (4l)

Helpfully, Rev. Proc. 2004-40 clarifies that a unilateral APA request covering multiple foreign jurisdictions will normally be considered a single APA request, unless separate analyses are required for each foreign jurisdiction (in which case the volume discount applies). (42)

Rev. Proc. 2004-40 raises the gross income cap for cases eligible for the lowest $5,000 user fee from $100 million to $200 million. Also, the user fee for "small transactions" (43) is now $5,000 in all cases.

Small Business Taxpayers and Small Transactions

Rev. Proc. 2004-40 incorporates, without substantial change, the simplified procedures for small business taxpayers and small transactions that previously appeared in Notice 98-65. (44) A small business taxpayer (SBT) is one whose worldwide consolidated gross income does not exceed $200 million. (Small transactions are as defined in the user fee context.) The coverage of small transactions by these procedures is no longer restricted by the phrase "if deemed appropriate by the Service." As before, transactions involving valuable intangibles or CSAs are not ordinarily eligible for the simplified procedures, although this may be considered on a case-by-case basis.

Boundaries of the Relationship: APA Term and Prospectivity

A major change is the increased duration anticipated for APAs. Whereas Rev. Proc. 96-53 simply suggested that the proposed term "be appropriate to the industry, product, or transaction involved," (45) Rev. Proc. 2004-40 adds that the proposed term should be at least five years (46) unless the taxpayer states a compelling reason for a shorter term.

In the same vein, Rev. Proc. 2004-40 emphasizes the desire for meaningful prospectivity by expressing the goal to have at least three prospective years remaining when a unilateral APA is executed or when the recommended negotiating position is completed for a bilateral or multilateral APA. Taxpayers are informed that the APA Program may require extension of the proposed term to ensure such prospectivity. (47) These provisions go beyond the PATA Guidance's reference to a usual three to five year term, mutually extendible if the bilateral APA takes more than two years to resolve ([section] 6.1).

Rev. Proc. 2004-40 also states that the delayed filing date permitted for APA requests (up to 120 days after the tax return due date for the first year to be covered if the user fee has been paid and a substantially complete APA request is filed within that period) will only be extended further in unusual circumstances.

The strongly expressed goal of long, prospective APAs puts a premium on flexible TPM designs and thoughtful use of critical assumptions to permit renegotiation if the business circumstances change significantly.

Living with an APA

Adjustments

Rev. Proc. 2004-40 clears up some confusion about what used to be called "compensating adjustments." (48) Ad justments are divided into APA primary adjustments and secondary adjustments. (49)

APA primary adjustments occur when the taxpayer's actual transactions do not comply with the TPM (e.g., because compliance with a CPM range cannot be determined until the year has ended), but the taxpayer must report taxable income consistent with the TPM on a timely filed return. A primary adjustment triggers correlative adjustments with respect to the related foreign taxpayer under Treas. Reg. [section] 1.482-1(g)(2).

Secondary adjustments occur to conform the taxpayer's accounts to the primary adjustment, if "APA revenue procedure treatment" (discussed below) is not elected. Secondary adjustments may result in tax consequences (see Treas. Reg. [section] 1.482-1(g)(3)). For instance, if the primary adjustment increases the U.S. taxpayer's income as if its cost of goods sold for goods purchased from its foreign parent were reduced, but no intercompany price adjustment is actually made, the amount in question may be treated as a dividend to the foreign parent, subject to applicable U.S. tax withholding. (50)

APA revenue procedure treatment follows the principles of Rev. Proc. 99-32, (51) which permits establishment of a non-interest-bearing intercompany account receivable or payable, as of the end of the taxable year in question, that must be paid within 90 days after the later of the return due date for the adjustment year or the APA's effective date. This process enables a taxpayer to avoid the adverse tax consequences of a secondary adjustment.

Primary adjustments are normally reported on the taxpayer's timely filed original return. Rev. Proc. 2004-40 is silent on Rev. Proc. 96-53's grant of an additional 90 days (coinciding with the due date of the annual report) to file an amended return in certain cases, (52) and the use of amended returns in general. The rules continue to permit primary adjustments to be reported on an amended return if the adjustments relate to APA years for which returns were filed before the APA was executed, as long as the return is filed within 90 days after executing the APA and the taxpayer "pay[s] such primary adjustments" within the same period. Some ambiguity lingers on whether deemed intercompany adjustments must in fact be paid between the related parties, or whether "pay such primary adjustments" simply (and logically) means the tax thereon. These aspects need to be clarified.

There is no longer a provision explicitly permitting the parties to agree in an APA to modify the foregoing provisions. (53)

Annual Reports

Taxpayer-favorable revisions include the notation (reflecting current practice) that the APA Director may extend the filing date in appropriate circumstances or agree to alternative filing dates in the APA itself. (54)

On the other side of the ledger, Rev. Proc. 2004-40 drops the "good faith" modifier to the APA compliance to be demonstrated in the annual report (and in connection with IRS audits), (55) apparently because of concerns with administrability. In the same vein, language permitting "good cause" extensions of the time specified by the IRS to supply additional information has been removed. (56) Tax payers are required to amend a filed annual report within 45 days after becoming aware of incorrect or incomplete information contained therein. (57) And, as discussed below, failure to timely file an annual report is now an explicit ground for cancellation of an APA.

Audits

As before, audit by the IRS field may change the taxpayer's operating results and lead to corrective adjustments. One change from Rev. Proc. 96-53, however, is that these adjustments will not be eligible for the favorable revenue procedure treatment described above. (58)

Record Retention

Maintenance of books and records sufficient to enable the field to examine the taxpayer's compliance will automatically fulfill the recordkeeping requirements of sections 6038A and 6038C. Presumably, it will no longer be necessary to include such a provision in the APA document itself.

Risks to the Relationship: Revision, Cancellation and Revocation of an APA

While the general concepts and consequences of the various ways to undo an APA are carried over from Rev. Proc. 96-53, several significant changes have been made:

* The concept of a change in law or treaty (which supersedes any inconsistent terms and conditions of the APA (59)) is expanded to explicitly include case law and regulations. The potential for revision or cancellation of the APA as the result of such a change, however, now appears to be limited to "material" changes. (60)

Expansion of the change-in-law definition poses several serious issues. First, a need to revise APAs to reflect changes in regulations may undermine the certainty sought in an APA. This may be amply illustrated in connection with significant upcoming changes to the services, intangibles, and cost-sharing regulations; taxpayers may also be concerned about changes related to litigating positions (viz., treatment of stock options in CSAs (61)). Second, additional uncertainty--from both taxpayer and IRS perspectives--may be injected by reference to case law, since it is often difficult to extrapolate generally applicable principles from transfer pricing decisions, questions could arise about the jurisdictional or precedential effect, and the "effective date" of the change in law could be debated. Finally, it is unclear whether the taxpayer has any obligation to notify the IRS of any potentially pertinent developments, or whether this is primarily a question of IRS enforcement. This whole area merits further consideration and comment. (62)

* Cancellation may now be triggered by a failure to file a timely annual report. (63) Other triggers, as before, are a taxpayer's misrepresentation, mistake as to a material fact, failure to state a material fact, lack of good faith compliance with the terms and conditions of the APA, and failure of a critical assumption. Rev. Proc. 2004-40 has new language stating that facts are material "with regard to annual reports"--presumably referring to facts reflected in annual reports--"if, for example, knowledge of the facts would have resulted in (a) a materially different allocation of income, deductions, or credits than reported in the annual report or (b) the failure to meet a critical assumption" (64) This suggests that a material misrepresentation of fact in an annual report may trigger cancellation of the APA. The same potential trigger is stated more clearly in the context of APA revocations. (65)

* There is a conspicuous failure to include late-filed annual reports and critical assumption failures in the provision permitting the IRS to waive cancellation if the taxpayer satisfactorily shows good faith and reasonable cause and agrees to make corrective adjustments. (66) One hopes this omission was inadvertent.

Life After the APA: Renewal

Several potentially important changes have been made with respect to APA renewals. (67) First, expedited processing is available if four conditions exist:

(1) Substantially the same law and policy applied to the prior APA;

(2) No substantial differences exist between the proposed TPM and the prior TPM;

(3) No material changes occurred in the taxpayer's facts and circumstances after the prior APA was entered into; and

(4) In the case of a bilateral APA, rollback or closed year (68) considerations "did not influence" the prior TPM.

Expedited processing means the APA Team will begin its renewal evaluation by considering the continuing applicability of the prior APA, using updated comparables as appropriate, and focusing on any changed facts and circumstances. A hedge, however, is that "experience and insight gained from applying the TPM to actual data," e.g., the annual reports, "may provide insight that indicates the need to modify the TPM."

Between that hedge and the narrow conditions, the potential for expedited processing may prove more theoretical than real. Since the availability of streamlined renewal procedures goes to the heart of the popularity of the APA Program, one would hope the IRS will apply a light touch in determining their availability.

A second change relates to the time for submitting a renewal request. Rev. Proc. 96-53 required that the request be submitted at least nine months prior to the conclusion of the existing APA term, though extensions were frequently granted in practice. (The need for extensions in part reflected the length of time required to negotiate the initial APA, which often resulted in the APA term having ended before the terms of the first APA were even known--along with related battle fatigue.) Rev. Proc. 2004-40 formally adopts instead the same timing requirement as for initial APA requests, i.e., the tax return due date for the first year of the renewal period, plus 120 days if the user fee is timely paid. Taxpayers are still "encouraged," however, to file the renewal request nine months before the expiration of the APA term.

Finally, by continuing to apply to renewals all the procedures that apply for initial APA requests, the IRS has sidestepped the opportunity to routinely limit the requirements for a renewal submission, rather than leaving this to possible negotiation at a PFC. It would hurt the appeal of the APA Program if this signals an institutional reluctance to narrow the requirements on a renewal, rather than just the difficulty of writing a universally acceptable set of more limited requirements.

Concluding Observations

The APA Program presents an extremely valuable opportunity for resolution of difficult transfer-pricing issues on a cooperative long-term basis. Rev. Proc. 2004-40 reflects the current, evolved procedures and adds some improvements at the margin. (69) Lengthened APA terms have the potential to significantly mitigate the cost of the APA experience. Although few provisions directly address the need to better integrate the APA and CA aspects, the commitment of key CAs to the strong and positive stance of the new PATA Guidance is cause for some optimism. The IRS may, however, have missed a marketing opportunity to broaden participation in the APA Program and enhance its processing efficiency by simplifying the process. While mindful of the IRS's concerns with due diligence and the perception of fairness, experience suggests that much of the information submitted drops from sight in the negotiating process. The IRS must take care not to make the APA procedure more daunting than an audit. Indeed, the PATA Guidelines ([section] 5.4) stress that the required APA documentation should not be more onerous than that required for an examination. In the end, procedures are just that--the hope is that business realism will be injected into their application and implementation.

(1) I.R.B. 2004-29 (July 19, 2004).

(2) Rev. Proc. 91-22, 1991-1 C.B. 526.

(3) Rev. Proc. 96-53, 1996-2 C.B. 375.

(4) Many changes reflect current practice, developed since 1996, as summarized in the APA Program's annual reports. See, e.g., IRS Ann. 2004-26, I.R.B. 2004-15 (March 30, 2004) (2003 APA Report).

(5) Letter dated December 22, 2003, from Senators Charles Grassley and Max Baucus to IRS Commissioner Mark Everson, 12 TAX Mgmnt Transfer Pricing Rep. 741 (Jan. 7, 2004).

(6) All section ([section]) references hereinafter are to Rev. Proc. 2004-40, unless otherwise noted.

(7) [section] 2.08.

(8) [sub section] 2.12&7.

(9) Treas. Reg. [section] 1.482-1(a)(3). This language, however, does not expressly preclude a refund at the IRS's initiative or by mutual agreement.

(10) [section] 4.01.

(11) [section] 4.02(3).

(12) [section] 4.03.

(13) See Tax Mgmnt Transfer Pricing Rep. 1138 (Apr. 30, 2003).

(14) See Rev. Proc. 2000-43, 2000-2 C.B. 404.

(15) [section] 4.04.

(16) Treas. Reg. [sub section] 1.482-7(a)(3) & (d)(2), effective August 26, 2003.

(17) Xilinx, Inc. v. Commissioner, T.C. No. 4142-01 (filed March 27, 2001).

(18) Treas. Reg. [section] 1.482-7(j). See FSA 200011021 (March 17, 2000)

(finding no qualified CSA due to such failure).

(19) [section] 4.09(3).

(20) This provision is in addition to the continuing provision under which substantial or persistent failure by the taxpayer to comply with the case plan may be treated as a withdrawal of the APA request. [section] 5.07(4).

(21) A new provision ([section] 12.04) has been added alerting taxpayers that APAs, APA annual reports, and factual information in background files are subject to exchange of information with foreign countries under treaties and tax information exchange agreements.

Rev. Proc. 2004-40 also drops the provision in Rev. Proc. 96-53 ([section] 9) authorizing the IRS to require the taxpayer to provide an independent expert acceptable to the IRS and foreign CA to review and opine on the proposed TPM. This was rarely used.

(22) 123 DTR L-5 (June 28, 2004) (PATA Guidance).

(23) [section] 6.01.

(24) [section] 3.05.

(25) [section] 6.04.

(26) [section] 2.09. The PATA Guidance specifically states ([section] 5.7) that position papers and correspondence exchanged between the CAs should not be provided to the taxpayer.

(27) The 2003 APA Report showed average processing time of 22

months for a new unilateral case (the median, however, was about 9 months) and 15 months for a bilateral APA negotiating position.

(28) 12 TAX MGMNT TRANSFER PRICING REP. 1060, 1061 (March 31, 2004).

(29) [section] 5.04.

(30) Rev. Proc. 96-53, [section] 6.05(6).

(31) [section] 5.10.

(32) [sub section] 12.01, 12.02 & 12.03. The legislative changes were enacted in response to litigation with the Bureau of National Affairs, Inc. seeking to treat APAs as "written determinations" open, along with background documents, to public inspection.

(33) [section] 2.04(3).

(34) [section] 2.06.

(35) See, e.g., [section] 14.01(6) with respect to annual adjustments; [section] 4.04(11) (CSAs).

(36) [section] 4.12(2)(a).

(37) [section] 4.12(1)(b).

(38) [section] 4.01(8).

(39) It is unclear whether this would affect the starting date of APA coverage or is just for user-fee computation purposes.

(40) [section] 4.12(1)(i).

(41) [section] 4.12(1)(h).

(42) [section] 4.12(1)(f).

(43) [section] 4.12(2)(e). Small transactions are those where the covered transactions involve tangible property or services with a total annual value not exceeding $50 million or annual payments for intangible property not exceeding $10 million, regardless of the taxpayer's gross income.

(44) 1998-2 C.B. 803. Minor changes in the procedure premise APA Office assistance in economic analysis on the SBT's request ([section] 8.05), drop examples of items that the parties may agree to eliminate from the submission ([section] 8.03), endeavor (rather than commit) to hold meetings at a location convenient to the SBT ([section] 8.04), require submission of a proposed draft APA for unilateral requests ([section] 8.06), and omit reference to a 3-5 year term.

(45) Rev. Proc. 96-53, [section] 5.09.

(46) This is consistent with APA Program experience, as indicated in the 2003 Report statistics, where 76 percent of the APAs completed that year had a term of five years or more.

(47) [section] 4.07(1).

(48) Rev. Proc. 96-53, [section] 11.02.

(49) [section] 10.02.

(50) Rev. Rul. 82-80, 1982-1 C.B. 89; Rev. Proc. 99-32, [section] 2.

(51) 1999-2 C.B. 296, dealing with voluntary or audit adjustments under section 482.

(52) Rev. Proc. 96-53, [section] 11.02(1).

(53) Compare Rev. Proc. 96-53, [section] 11.02(5).

(54) [section] 10.01(2).

(55) [sub section] 10.01(1) & 10.03(2); compare Rev. Proc. 96-53, [sub section] ll.01(1) & 11.03(2).

(56) [section] 10.01(3); compare Rev. Proc. 96-53, [section] 11.01(3).

(57) [section] 10.01(5).

(58) Rev. Proc. 96-53, [section] 11.03(4).

(59) [section] 10.08.

(60) Perhaps inadvertently, this limitation is not included in the supercession provision, nor is it clear whether cancellation is a unilateral IRS decision or a mutual agreement. Compare [sub section] 10.05(1) & 10.08.

(61) Treas. Reg. [sub section] 1.482-7(a)(3) & (d)(2).

(62) Apropos whether this change might be viewed as a mere clarification of the prior provision and therefore applicable to APAs currently in force, similar language in Treas. Reg. [section] 301.7121-1(c) (relating to closing agreements) has been interpreted to refer only to changes in statutory law, not to judicial, regulatory, or ruling changes. See, e.g., GCM 34398 (Jan. 4, 1971), revoked by GCM 36422 (not directly on this point); but see FSA 1993-0415-1 (Apr. 15, 1993).

(63) See also PATA Guidance, [section] 6.4.

(64) [section] 10.06(1).

(65) [section] 10.07(1).

(66) [section] 10.06(2).

(67) [section] 11.

(68) Presumably, this refers to years closed under the statute of 

limitations, not just "completed" years--which inevitably influence the development of a TPM but confirmation of this point would be helpful.

(69) Unfortunately, there is no reference to the perennially difficult issues posed by section 1059A and coordination with Customs processes; optimally, that will eventually be addressed.

PATRICIA GIMBEL LEWIS is a partner in the Washington, D.C., law firm of Caplin & Drysdale, Chartered. She received J.D. and M.B.A. degrees from Harvard University in 1971, with honors, and her undergraduate degree from Wellesley College. Mrs. Lewis was a member of the 1994-1996 IRS Commissioner's Advisory Group, and co-chaired the Taxation Section of the District of Columbia Bar from 1992 to 1995. Mrs. Lewis's prior articles for The Tax Executive include: Markers and Musings: The Proposed Section 482 Services Regulations (2003); Second First??? Transfer Pricing Issues in Secondment of Personnel (2002); Mining for Nuggets in the IRS APA Report (2000); Now What? Collateral Consequences of Transfer Pricing Adjustments (1995); and Strategic Choices for Transfer-Pricing Controversies (1992).